Peruvian paper questions role of money in New-Keynesian models

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A working paper published by the Central Bank of Peru on October 16 investigates the use of New-Keynesian models in monetary policy analysis, focusing on why they do not include any measure of the quantity of money within their variables.

The author, Bennett McCallum, says "almost all" central banks conduct policy by deciding upon and setting interest rates without explicit reference to the change in real-money balances over time. In principle, the author says, this is incorrect. Rather, the

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