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Money and Inflation in an Inflation-Tageting Regime

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  • Pablo García S.
  • Rodrigo Valdés P.

Abstract

This work describes the role of money in the current inflation-targeting framework in Chile, in particular given the large recent annual increase in M1A. From a conceptual standpoint, it analyzes the relationship between money growth and inflation, as well as the interpretation of movements in monetary aggregates. Empirically, the article evaluates the informational content of money as an indicator of inflationary pressures in Chile, and examines whether the recent evolution of M1A is consistent with money demand fundamentals. The evidence indicates that the recent trajectory of money does not represent a material risk to the achievement of the inflation target.

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Bibliographic Info

Article provided by Central Bank of Chile in its journal Economía Chilena.

Volume (Year): 6 (2003)
Issue (Month): 1 (April)
Pages: 21-47

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Handle: RePEc:chb:bcchec:v:6:y:2003:i:1:p:21-47

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  1. Bernanke, Ben S & Woodford, Michael, 1997. "Inflation Forecasts and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 29(4), pages 653-84, November.
  2. Patricio Rojas, 1993. "El Dinero como un Objetivo Intermedio de Política Monetaria en Chile: Un Análisis Empírico," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 30(90), pages 139-178.
  3. Hall, Stephen G & Milne, Alistair, 1994. "The Relevance of P-Star Analysis to UK Monetary Policy," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 104(424), pages 597-604, May.
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  5. César Calderón M. & Francisco Gallego Y., 2002. "La Tasa de Interés Real Neutral en Chile," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, Central Bank of Chile, vol. 5(2), pages 65-72.
  6. Canzoneri, Matthew B & Henderson, Dale W & Rogoff, Kenneth S, 1983. "The Information Content of the Interest Rate and Optimal Monetary Policy," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 98(4), pages 545-66, November.
  7. De Grauwe, Paul & Polan, Magdalena, 2001. "Is Inflation Always and Everywhere a Monetary Phenomenon?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2841, C.E.P.R. Discussion Papers.
  8. McCallum, Bennett T., 1986. "Some issues concerning interest rate pegging, price level determinacy, and the real bills doctrine," Journal of Monetary Economics, Elsevier, Elsevier, vol. 17(1), pages 135-160, January.
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  10. Hallman, Jeffrey J & Porter, Richard D & Small, David H, 1991. "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?," American Economic Review, American Economic Association, American Economic Association, vol. 81(4), pages 841-58, September.
  11. Gerald P. Dwyer, Jr. & R.W. Hafer, 1999. "Are money growth and inflation still related?," Economic Review, Federal Reserve Bank of Atlanta, Federal Reserve Bank of Atlanta, issue Q2, pages 32-43.
  12. Francisco Rosende, 2002. "La Nueva Síntesis Keynesiana: Análisis e Implicancias de Política Monetaria," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 39(117), pages 203-233.
  13. Bennett T. McCallum, 1982. "Price Level Determinacy with an Interest Rate Policy Rule and Rational Expectations," NBER Working Papers 0559, National Bureau of Economic Research, Inc.
  14. Lucas, Robert E, Jr, 1980. "Two Illustrations of the Quantity Theory of Money," American Economic Review, American Economic Association, American Economic Association, vol. 70(5), pages 1005-14, December.
  15. D. M. Nachane & R. Lakshmi, 2002. "Dynamics of inflation in India - a P-Star approach," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 34(1), pages 101-110.
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