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Money in the era of inflation targeting

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Author Info
W A Razzak (Reserve Bank of New Zealand)

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Abstract

This paper provides evidence that the relationship between inflation and money growth has changed as the inflation-targeting regime has progressed. During the disinflation period (mid 1980s to mid or late 1991) the correlation between inflation and money aggregates was fairly consistent with the prediction of theory. Both inflation and money growth fell sharply. In 1992, inflation was stabilised around an average of little less than 2 per cent. Since then, the correlation between money growth and inflation has been fairly weak at the permanent (trend) and the business cycle frequencies. By contrast, there is a significant correlation between money and real GDP over the business cycle. As far as base velocity is concerned, it was stable up until December 1997, but broke down in late 1998. As money growth took off in the late 1990s, velocity declined rather sharply, but these downward trends are consistent with the decline of interest rates as predicted by the quantity theory of money. The demand for real-monetary base is well behaved and interest inelastic, but this relationship also broke down in late 1998. However, both velocity-interest rate and money demand function breakdown is probably only temporary. Finally, at least until March 1999, the rate of growth of the monetary base has, on average, been consistent with a nominal GDP targeting policy of 4 per cent.

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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2001/02.

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Length: 54p
Date of creation: Jul 2001
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Handle: RePEc:nzb:nzbdps:2001/02

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Find related papers by JEL classification:
E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Siklos, Pierre L. & Eckhold, Kelly R., 1997. "Income Velocity in Turbulent Times: The Role of Institutional Factors in the New Zealand Experience," Journal of Macroeconomics, Elsevier, vol. 19(1), pages 31-52, January. [Downloadable!] (restricted)
  2. Bennett T. McCallum, 1997. "Issues in the Design of Monetary Policy Rules," NBER Working Papers 6016, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. John B. Taylor, 1998. "Monetary policy and the long boom," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 3-12. [Downloadable!]
  4. Sergio Nicoletti Altimari, 2001. "Does money lead inflation in the euro area?," Working Paper Series 063, European Central Bank. [Downloadable!]
  5. David Laidler, 1999. "Passive Money, Active Money, and Monetary Policy," Bank of Canada Review, Bank of Canada, vol. 20(Summer), pages 15-25. [Downloadable!]
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  8. McCallum, Bennett T, 1985. "On Consequences and Criticisms of Monetary Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 570-97, November. [Downloadable!] (restricted)
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  9. David E. A. Giles, 1999. "Modelling the Hidden Economy and the Tax-Gap in New Zealand," Econometrics Working Papers 9905, Department of Economics, University of Victoria. [Downloadable!]
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  10. Wallace, Neil, 1997. "Short-Run and Long-Run Effects of Changes in Money in a Random-Matching Model," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1293-1307, December.
  11. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
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    Other versions:
  13. Phillips, Peter C B & Loretan, Mico, 1991. "Estimating Long-run Economic Equilibria," Review of Economic Studies, Blackwell Publishing, vol. 58(3), pages 407-36, May. [Downloadable!] (restricted)
    Other versions:
  14. Miguel Molico, 2006. "The Distribution Of Money And Prices In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 701-722, 08. [Downloadable!] (restricted)
  15. William Poole, 1994. "Monetary aggregates targeting in a low-inflation economy," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 87-135. [Downloadable!]
  16. Pagan, Adrian, 1974. "A Generalised Approach to the Treatment of Autocorrelation," Australian Economic Papers, Blackwell Publishing, vol. 13(23), pages 267-80, December.
  17. Aaron Drew & L Christopher Plantier, 2000. "Interest rate smoothing in New Zealand and other dollar bloc countries," Reserve Bank of New Zealand Discussion Paper Series DP2000/10, Reserve Bank of New Zealand. [Downloadable!]
  18. Elliott, Graham, 1999. "Efficient Tests for a Unit Root When the Initial Observation Is Drawn from Its Unconditional Distribution," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(3), pages 767-83, August.
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  19. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November. [Downloadable!] (restricted)
    Other versions:
  20. Robert J. Gordon, 1985. "The Conduct of Domestic Monetary Policy," NBER Working Papers 1221, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  21. Stefan Gerlach & Lars E.O. Svensson, 2000. "Money and Inflation in the Euro Area: A Case for Monetary Indicators?," NBER Working Papers 8025, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  22. Zellner, Arnold & Hong, Chansik & Min, Chung-ki, 1991. "Forecasting turning points in international output growth rates using Bayesian exponentially weighted autoregression, time-varying parameter, and pooling techniques," Journal of Econometrics, Elsevier, vol. 49(1-2), pages 275-304. [Downloadable!] (restricted)
  23. Harding, Don & Pagan, Adrian, 2002. "Dissecting the cycle: a methodological investigation," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 365-381, March. [Downloadable!] (restricted)
    Other versions:
  24. Professor Lars E O Svensson, 2001. "Independent review of the operation of monetary policy in New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 64, March. [Downloadable!]
  25. Robert E. Hall & N. Gregory Mankiw, 1994. "Nominal Income Targeting," NBER Working Papers 4439, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Philip Liu, 2004. "Improving implementation of inflation targeting in New Zealand: an investigation of the Reserve Bank's inflation errors," Reserve Bank of New Zealand Discussion Paper Series DP 2004/06, Reserve Bank of New Zealand. [Downloadable!]
  2. Francisco Rosende R., 2004. "El marco teórico de la política monetaria," Revista de Analisis Economico – Economic Analysis Review, Ilades-Georgetown University, Economics Department, vol. 19(2), pages 85-117, December. [Downloadable!]
  3. Nicholas Rowe, 2002. "How to Improve Inflation Targeting at the Bank of Canada," Working Papers 02-23, Bank of Canada. [Downloadable!]
  4. Abbas Valadkhani, 2003. "Long and Short-Run Determinants of Money Demand in New Zealand: Evidence from Cointegration Analysis," School of Economics and Finance Discussion Papers and Working Papers Series 132, School of Economics and Finance, Queensland University of Technology. [Downloadable!]
  5. Francisco Rosende & Matías Tapia, 2006. "La Caída de la Inflación en Chile: Políticas, Instituciones y Suerte," Documentos de Trabajo 308, Instituto de Economía. Pontificia Universidad Católica de Chile.. [Downloadable!]
  6. Jose De Gregorio, 2004. "Rapid Growth Of Monetary Aggregates And Inflation: The International Evidence," Working Papers Central Bank of Chile 256, Central Bank of Chile. [Downloadable!]
  7. Jose De Gregorio, 2003. "Dinero e Inflación: ¿En Qué Estamos?," Working Papers Central Bank of Chile 201, Central Bank of Chile. [Downloadable!]
  8. Francisco Rosende, 2003. "Conducción de la Política Monetaria," Documentos de Trabajo 247, Instituto de Economía. Pontificia Universidad Católica de Chile.. [Downloadable!]
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