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On the Optimal Adherence to Money Targets in a New-Keynesian Framework

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Author Info

  • Andrew Berg
  • D. Filiz Unsal
  • Rafael Portillo

Abstract

Many low-income countries continue to describe their monetary policy framework in terms of targets on monetary aggregates. This contrasts with most modern discussions of monetary policy, and with most practice. We extend the new-Keynesian model to provide a role for “M†in the conduct of monetary policy, and examine the conditions under which some adherence to money targets is optimal. In the spirit of Poole (1970), this role is based on the incompleteness of information available to the central bank, a pervasive issues in these countries. Ex-ante announcements/forecasts for money growth are consistent with a Taylor rule for the relevant short-term interest rate. Ex-post, the policy maker must choose his relative adherence to interest rate and money growth targets. Drawing on the method in Svensson and Woodford (2004), we show that the optimal adherence to ex-ante targets is equivalent to a signal extraction problem where the central bank uses the money market information to update its estimate of the state of the economy. We estimate the model, using Bayesian methods, for Tanzania, Uganda (both de jure money targeters), and Ghana (a de jure inflation targeter), and compare the de facto adherence to targets with the optimal use of money market information in each country.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/134.

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Length: 31
Date of creation: 01 Jun 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/134

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Related research

Keywords: Central bank policy; Economic models; Low-income developing countries; Monetary aggregates; monetary policy; inflation; central bank; money demand; money growth; money market; monetary economics; monetary aggregate; real interest rate; money balances; real money; inflation targeting; optimal monetary policy; nominal interest rate; aggregate demand; money supply; monetary transmission; monetary transmission mechanism; price level; monetary fund; monetary authorities; monetary policy framework; inflationary pressures; monetary policy instruments; rational expectations; high inflation; nominal interest rates; low inflation; quantity theory; monetary policy rule; neutrality of money; monetary policy transmission mechanism; demand for money; monetary policy reaction function; macroeconomic stability; monetary policy strategy; monetary policy rules; lower inflation; real output; monetary union; monetary targeting; monetary theory; real interest rates; increase in interest rates; inflation targeting regime;

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Cited by:
  1. Andrew Berg & Luisa Charry & Rafael A Portillo & Jan Vlcek, 2013. "The Monetary Transmission Mechanism in the Tropics," IMF Working Papers 13/197, International Monetary Fund.
  2. Helge Berger & Henning Weber, 2012. "Money As Indicator for the Natural Rate of Interest," IMF Working Papers 12/6, International Monetary Fund.
  3. Michal Andrle & Andrew Berg & Enrico Berkes & Rafael A Portillo & Jan Vlcek & R. Armando Morales, 2013. "Money Targeting in a Modern Forecasting and Policy Analysis System: an Application to Kenya," IMF Working Papers 13/239, International Monetary Fund.
  4. Yuko Hashimoto & Konstantin Wacker, 2012. "The Role of Risk and Information for International Capital Flows," IMF Working Papers 12/242, International Monetary Fund.

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