The role of money in the monetary policy rule

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    Abstract

    Recently, the European Central Bank emphasized two pillar strategy for monetary policy analysis in terms of considering the role of money in the long run. The background of this strategy is that the long-run money growth plays an important role in explaining the Phillips curve or the money functions as a cross-check for the short run and long-run inflation targeting. Additionally, recent study showed that the money is important for explaining the IS model. This study examines the role of money in the monetary policy rule through looking at the significant role of money in the Phillips curve and in the IS model on the ground that the optimal monetary policy rule can be derived based on the Phillips curve and the IS model. The empirical results show using after-Korean financial crisis data that most of monetary aggregates except the Lf (M3) are not statistically significant in the Phillips curve and the IS model. This result implies that it is unlikely for the money to play an important role in the Taylor-type monetary policy rule. However, the Lf monetary aggregate appears to be statistically significant, and thus this study suggests that the Bank of Korea (BOK) looks carefully into the information on the Lf monetary aggregate when the BOK conducts the Taylor-type monetary policy rule.

    Original languageEnglish
    Pages (from-to)91-112
    Number of pages22
    JournalJournal of Economic Theory and Econometrics
    Volume21
    Issue number3
    Publication statusPublished - 2010 Sept

    Keywords

    • Is model
    • M3 & Lf monetary aggregate
    • Monetary policy rule
    • Two pillar phillips curve
    • Two pillar strategy

    ASJC Scopus subject areas

    • Economics and Econometrics

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