Is money still useful for policy in East Asia?

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Is money still useful for policy in East Asia?

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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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This paper has been announced in the following NEP Reports:

NEP-ALL-2002-05-07 (All new papers)
NEP-IFN-2002-05-07 (International Finance)
NEP-SEA-2002-05-07 (South East Asia)

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