New study unifies economic and monetary analysis for European Central Bank.
The New-Keynesian model for monetary policy analysis was found to be inconsistent, with the interest rate determined by two equations and the price level left undetermined. By replacing the Taylor rule with a money demand equation, the model was made consistent and aligned with monetarist theory. Both the original and modified models were tested on US data, showing that the European Central Bank could benefit from a unified economic and monetary analysis framework.