Money and the natural rate of interest : structural estimates for the United States and the Euro Area

Abstract

We examine the role of money in three environments: the New Keynesian model with separable utility and static money demand

a nonseparable utility variant with habit formation

and a version with adjustment costs for holding real balances. The last two variants imply forward-looking behavior of real money balances, with forecasts of future interest rates entering current portfolio decisions. We conduct a structural econometric analysis of the U.S. and euro area economies. FIML estimates confirm the forward-looking character of money demand. A consequence is that real money balances are valuable in anticipating future variations in the natural interest rate