411 144 ecb d All rights reserved. Photocopying for educational and non-commercial purposes permitted provided that the source is acknowledged. ISSN 1607-1484Table of contents Abstract 5 1 Introduction: general aspects of the reference value for monetary growth in the context of the ECB’s monetary policy strategy 7 2 A first look at the data 10 2.1 The concept of M3 income velocity and its behaviour in the euro area 10 2.2 Data and aggregation issues 12

In a simple dynamic macroeconomic model, it is shown that uncertainty about structural parameters does not necessarily lead to more cautious monetary policy, refining the accepted wisdom concerning the effects of parameter uncertainty on optimal policy. In particular, when there is uncertainty about the persistence of inflation, it may be optimal for the central bank to respond more aggressively to shocks than under certainty equivalence, since the central bank this way reduces uncertainty about the future development of inflation. Uncertainty about other parameters, in contrast, acts to dampen the policy response.

Non-technical summary 5 1

This paper describes some recent advances and contributions to our understanding of economic forecasting. The framework we develop helps explain the findings of forecasting competitions and the prevalence of forecast failure. It constitutes a general theoretical background against which recent results can be judged. We compare this framework to a previous formulation, which was silent on the very issues of most concern to the forecaster. We describe a number of aspects which it illuminates, and draw out the implications for model selection. Finally, we discuss the areas where research remains needed to clarify empirical findings which lack theoretical explanations.

Transparency has become one of the key features of monetary policy. This paper analyzes the incentives to adopt transparency, focusing on the publication of central bank forecasts. A simple dynamic monetary policy game is considered in which transparency leads to a beneficial reduction of the inflation bias but need not be desired by every central bank. However, when transparency is endogenous, the negative market feedback associated with secrecy could provide a sufficiently strong inducement for all central banks to adopt transparency.

Non-technical summary 5 1.

We present maximum likelihood estimates of a small scale dynamic general equilibrium model for the euro area. We pay special attention to the role of money, both through its direct e¤ect upon private agents ’ decisions and as a component of the monetary policy rule. Our results can be summarised as follows. First, we …nd no direct e¤ect of money upon in‡ation and output but money growth plays a signi…cant role in the interest rate rule. Second, money demand shocks mainly help to forecast real balances while real shocks explain the bulk of price, output and interest rates ‡uctuations. Finally, the systematic response of monetary policy implies a path for real interest rates close to that followed by the natural rate of interest. We thank Jordi Galí and Gabriel Pérez-Quiros for their comments. Special thanks go to Peter Ireland for providing us with his estimation programs. The views expressed here are those of the authors and do not represent the view of the Banco de España.

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