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Is money still useful for policy in East Asia?

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Author Info
Ramon Moreno
Reuven Glick

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Abstract

Since the East Asian crises of 1997, a number of East Asian economies have allowed greater exchange rate flexibility and abandoned monetary targets in favor of inflation targeting, apparently because the perceived usefulness of money as a predictor of inflation, i.e. the information content of money, has fallen. In this paper, we discuss factors that are likely to have influenced the stability of the relationship between money and inflation, particularly in the 1990s, and then assess this relationship in a set of East Asian economies. We focus on (1) the stability of the behavior of the velocity of money; (2) the ability of money growth to predict inflation as measured by tests of Granger causality, and (3) the contribution of money to the variance of the forecast error of inflation. We find evidence that, with a few exceptions in which capital flows were particularly large, velocity remained generally stable, as did the relationship between money growth and inflation. However, the contribution of money to inflation forecast errors fell considerably in the 1990s, reducing its value as an information variable to monetary authorities.

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Paper provided by Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series with number 01-12.

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Date of creation: 2001
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Handle: RePEc:fip:fedfpb:01-12

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Keywords: Banks and banking Foreign Philippines

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  1. Richard Clarida & Jordi Gali & Mark Gertler, 1997. "Monetary Policy Rules in Practice: Some International Evidence," NBER Working Papers 6254, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Breedon, F J & Fisher, P G, 1996. "M0: Causes and Consequences," The Manchester School of Economic & Social Studies, Blackwell Publishing, vol. 64(4), pages 371-87, December.
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  3. Benjamin M. Friedman & Kenneth N. Kuttner, 1996. "A Price Target for U.S. Monetary Policy? Lessons from the Experience with Money Growth Targets," NBER Reprints 2091, National Bureau of Economic Research, Inc.
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  4. Cara Lown & Stavros Peristiani & Kenneth J. Robinson, 1999. "What was behind the M2 breakdown?," Financial Industry Studies Working Paper 99-2, Federal Reserve Bank of Dallas. [Downloadable!]
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  5. Wei, S.J. & Frankel, J.A., 1992. "Yen Bloc or Dollar Bloc: Exchange Rate Policies of the East Asian Economies," Papers 92-08, University of Birmingham - International Financial Group.
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  6. Ramon Moreno & Mark M. Spiegel, 1997. "Are Asian economies exempt from the "impossible trinity?": evidence from Singapore," Pacific Basin Working Paper Series 97-01, Federal Reserve Bank of San Francisco.
  7. Kelly Ragan & Bharat Trehan, 1998. "Is it time to look at M2 again?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Mar 6. [Downloadable!]
  8. Estrella, Arturo & Mishkin, Frederic S., 1997. "Is there a role for monetary aggregates in the conduct of monetary policy?," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 279-304, October. [Downloadable!] (restricted)
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  9. Michael Dotsey & Christopher Otrok, 1994. "M2 and monetary policy: a critical review of the recent debate," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 41-49. [Downloadable!]
  10. Ramon Moreno, 2000. "Pegging and macroeconomic performance in East Asia," Pacific Basin Working Paper Series 00-03, Federal Reserve Bank of San Francisco. [Downloadable!]
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  11. Palivos, Theodore & Wang, Ping, 1995. "Money, Output and Income Velocity," Applied Economics, Taylor and Francis Journals, vol. 27(11), pages 1113-25, November.
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