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Is money still useful for policy in East Asia?

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  • Ramon Moreno
  • Reuven Glick

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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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series with number 2001-12.

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

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Keywords: Banks and banking; Foreign ; Philippines;

References

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  1. Clarida, Richard & GalĂ­, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," CEPR Discussion Papers 1750, C.E.P.R. Discussion Papers.
  2. 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.
  3. 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.
  4. Theodore Palivos & Ping Wang, 1993. "Money, output, and income velocity," Research Paper 9305, Federal Reserve Bank of Dallas.
  5. Breedon, F J & Fisher, P G, 1996. "M0: Causes and Consequences," The Manchester School of Economic & Social Studies, University of Manchester, vol. 64(4), pages 371-87, December.
  6. Kelly Ragan & Bharat Trehan, 1998. "Is it time to look at M2 again?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue mar6.
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