IDEAS home Printed from https://ideas.repec.org/p/rbp/wpaper/2017-003.html
   My bibliography  Save this paper

Monetary Aggregates and Monetary Policy in Peru

Author

Listed:
  • Lahura, Erick

    (Banco Central de Reserva del Perú)

Abstract

This paper investigates empirically the usefulness of monetary aggregates as information variables in the conduct of monetary policy. For this purpose, some recent advances on the topic were used, which include the analysis of both real-time and revised final data, and the application of Bayesian model averaging to allow for model uncertainty regarding the lag length and number of cointegrating relationships. In this paper, money is considered as an information variable for Wt (e.g. output or prices) if the following two criteria are satisfied: (i) Mt is strongly exogenous, and (ii) Mt Granger-causes Wt. Strong exogeneity is relevant because it validates conditional forecasting of Wt using monetary aggregates as conditioning variables. The results show no strong evidence supporting the usefulness of monetary aggregates as information variables for prices or output. However, this does not preclude their potential use as information variables for other macroeconomic targets such as financial stability. It is worth mentioning that the results do not imply that monetary policy in Peru is not useful.

Suggested Citation

  • Lahura, Erick, 2017. "Monetary Aggregates and Monetary Policy in Peru," Working Papers 2017-003, Banco Central de Reserva del Perú.
    • Handle: RePEc:rbp:wpaper:2017-003
    as

    Download full text from publisher

    File URL: https://www.bcrp.gob.pe/docs/Publicaciones/Documentos-de-Trabajo/2017/documento-de-trabajo-03-2017.pdf
    File Function: Application/pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Aksoy, Yunus & Piskorski, Tomasz, 2006. "U.S. domestic money, inflation and output," Journal of Monetary Economics, Elsevier, vol. 53(2), pages 183-197, March.
    2. Kareken, John H & Muench, Thomas & Wallace, Neil, 1973. "Optimal Open Market Strategy: The Use of Information Variables," American Economic Review, American Economic Association, vol. 63(1), pages 156-172, March.
    3. Benchimol, Jonathan & Fourçans, André, 2012. "Money and risk in a DSGE framework: A Bayesian application to the Eurozone," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 95-111.
    4. Coenen, Gunter & Levin, Andrew & Wieland, Volker, 2005. "Data uncertainty and the role of money as an information variable for monetary policy," European Economic Review, Elsevier, vol. 49(4), pages 975-1006, May.
    5. Guenter W. Beck & Volker Wieland, 2007. "Money in Monetary Policy Design: A Formal Characterization of ECB-Style Cross-Checking," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 524-533, 04-05.
    6. Nelson, Edward, 2003. "The future of monetary aggregates in monetary policy analysis," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1029-1059, July.
    7. Benati, Luca & Goodhart, Charles, 2010. "Monetary Policy Regimes and Economic Performance: The Historical Record, 1979-2008," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 21, pages 1159-1236, Elsevier.
    8. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    9. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
    10. Henrik Hansen & Søren Johansen, 1999. "Some tests for parameter constancy in cointegrated VAR-models," Econometrics Journal, Royal Economic Society, vol. 2(2), pages 306-333.
    11. Johansen, Soren, 1992. "Cointegration in partial systems and the efficiency of single-equation analysis," Journal of Econometrics, Elsevier, vol. 52(3), pages 389-402, June.
    12. Michael Woodford, 2008. "How Important Is Money in the Conduct of Monetary Policy?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1561-1598, December.
    13. Cúrdia, Vasco & Woodford, Michael, 2011. "The central-bank balance sheet as an instrument of monetarypolicy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 54-79, January.
    14. Goldfeld, Stephen M. & Sichel, Daniel E., 1990. "The demand for money," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 8, pages 299-356, Elsevier.
    15. Bernanke, Ben S. & Boivin, Jean, 2003. "Monetary policy in a data-rich environment," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 525-546, April.
    16. Erick Lahura & Donita Rodriguez, 2006. "About the role of monetary aggregates for monetary policy: the case of Peru," Documentos de Trabajo / Working Papers 2005-243, Departamento de Economía - Pontificia Universidad Católica del Perú.
    17. Andrew Berg & Eduardo Borensztein, 2000. "The Choice of Exchange Rate Regime and Monetary Target in Highly Dollarized Economies," Journal of Applied Economics, Taylor & Francis Journals, vol. 3(2), pages 285-324, November.
    18. Garratt, Anthony & Koop, Gary & Mise, Emi & Vahey, Shaun P., 2009. "Real-Time Prediction With U.K. Monetary Aggregates in the Presence of Model Uncertainty," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(4), pages 480-491.
    19. Leigh Drake & Adrian R. Fleissig, 2006. "Adjusted monetary aggregates and UK inflation targeting," Oxford Economic Papers, Oxford University Press, vol. 58(4), pages 681-705, October.
    20. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, March.
    21. Thornton, Daniel L., 2014. "Monetary policy: Why money matters (and interest rates don’t)," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 202-213.
    22. Dreger, Christian & Wolters, Jürgen, 2015. "Unconventional monetary policy and money demand," Journal of Macroeconomics, Elsevier, vol. 46(C), pages 40-54.
    23. Cavaliere, Giuseppe & Rahbek, Anders & Taylor, A.M. Robert, 2010. "Cointegration Rank Testing Under Conditional Heteroskedasticity," Econometric Theory, Cambridge University Press, vol. 26(6), pages 1719-1760, December.
    24. Kandil, Magda, 2005. "Money, interest, and prices: Some international evidence," International Review of Economics & Finance, Elsevier, vol. 14(2), pages 129-147.
    25. Hafer, R.W. & Haslag, Joseph H. & Jones, Garett, 2007. "On money and output: Is money redundant?," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 945-954, April.
    26. Banerjee, Anindya & Dolado, Juan J. & Galbraith, John W. & Hendry, David, 1993. "Co-integration, Error Correction, and the Econometric Analysis of Non-Stationary Data," OUP Catalogue, Oxford University Press, number 9780198288107, Decembrie.
    27. J.-F. Richard, 1980. "Models with Several Regimes and Changes in Exogeneity," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 47(1), pages 1-20.
    28. Lippi, Francesco & Neri, Stefano, 2007. "Information variables for monetary policy in an estimated structural model of the euro area," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1256-1270, May.
    29. Dean Croushore & Tom Stark, 2003. "A Real-Time Data Set for Macroeconomists: Does the Data Vintage Matter?," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 605-617, August.
    30. Perron, Pierre, 1997. "Further evidence on breaking trend functions in macroeconomic variables," Journal of Econometrics, Elsevier, vol. 80(2), pages 355-385, October.
    31. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    32. Binner, J.M. & Tino, P. & Tepper, J. & Anderson, R. & Jones, B. & Kendall, G., 2010. "Does money matter in inflation forecasting?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(21), pages 4793-4808.
    33. Hendry, David F., 1995. "Dynamic Econometrics," OUP Catalogue, Oxford University Press, number 9780198283164, Decembrie.
    34. Lucas, Robert E. & Nicolini, Juan Pablo, 2015. "On the stability of money demand," Journal of Monetary Economics, Elsevier, vol. 73(C), pages 48-65.
    35. 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.
    36. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    37. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, vol. 82(3), pages 472-492, June.
    38. Sims, Christopher A, 1972. "Money, Income, and Causality," American Economic Review, American Economic Association, vol. 62(4), pages 540-552, September.
    39. Juselius, Katarina, 2006. "The Cointegrated VAR Model: Methodology and Applications," OUP Catalogue, Oxford University Press, number 9780199285679, Decembrie.
    40. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    41. Hyun Jeong Kim & Hyun Song Shin & Jacho Yun, 2013. "Monetary Aggregates and the Central Bank’s Financial Stability Mandate," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 69-108, January.
    42. Dotsey, Michael & Hornstein, Andreas, 2003. "Should a monetary policymaker look at money?," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 547-579, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lahura, Erick, 2010. "Monetary aggregates and monetary policy: an empirical assessment for Peru," Working Papers 2010-019, Banco Central de Reserva del Perú.
    2. Paul, Sunil & Ramachandran, M., 2011. "Currency equivalent monetary aggregates as leading indicators of inflation," Economic Modelling, Elsevier, vol. 28(4), pages 2041-2048, July.
    3. Franz Seitz & Markus A. Schmidt, 2014. "Money In Modern Macro Models: A Review of the Arguments," Journal of Reviews on Global Economics, Lifescience Global, vol. 3, pages 156-174.
    4. Beck, Guenter W. & Wieland, Volker, 2008. "Central bank misperceptions and the role of money in interest-rate rules," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages 1-17, October.
    5. Givens, Gregory E. & Salemi, Michael K., 2015. "Inferring monetary policy objectives with a partially observed state," Journal of Economic Dynamics and Control, Elsevier, vol. 52(C), pages 190-208.
    6. McCallum, Bennett T. & Nelson, Edward, 2010. "Money and Inflation: Some Critical Issues," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 3, pages 97-153, Elsevier.
    7. Qureshi, Irfan, 2018. "Money Aggregates and Determinacy : A Reinterpretation of Monetary Policy During the Great Inflation," The Warwick Economics Research Paper Series (TWERPS) 1156, University of Warwick, Department of Economics.
    8. John W. Keating & Logan J. Kelly & A. Lee Smith & Victor J. Valcarcel, 2019. "A Model of Monetary Policy Shocks for Financial Crises and Normal Conditions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(1), pages 227-259, February.
    9. Akhand Akhtar Hossain, 2009. "Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 12777.
    10. Travaglini, Guido, 2007. "The U.S. Dynamic Taylor Rule With Multiple Breaks, 1984-2001," MPRA Paper 3419, University Library of Munich, Germany, revised 15 Jun 2007.
    11. Michael Woodford, 2008. "How Important Is Money in the Conduct of Monetary Policy?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1561-1598, December.
    12. Nelson, Edward, 2003. "The future of monetary aggregates in monetary policy analysis," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1029-1059, July.
    13. Garratt, Anthony & Koop, Gary & Mise, Emi & Vahey, Shaun P., 2009. "Real-Time Prediction With U.K. Monetary Aggregates in the Presence of Model Uncertainty," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(4), pages 480-491.
    14. Mr. Helge Berger & Mr. Thomas Harjes & Mr. Emil Stavrev, 2008. "The ECB’s Monetary Analysis Revisited," IMF Working Papers 2008/171, International Monetary Fund.
    15. Hendrickson, Joshua R., 2014. "Redundancy Or Mismeasurement? A Reappraisal Of Money," Macroeconomic Dynamics, Cambridge University Press, vol. 18(7), pages 1437-1465, October.
    16. Matteo Barigozzi & Antonio M. Conti, 2018. "On the Stability of Euro Area Money Demand and Its Implications for Monetary Policy," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 80(4), pages 755-787, August.
    17. John D. Levendis, 2018. "Time Series Econometrics," Springer Texts in Business and Economics, Springer, number 978-3-319-98282-3, June.
    18. Chevapatrakul, Thanaset & Kim, Tae-Hwan & Mizen, Paul, 2012. "Monetary information and monetary policy decisions: Evidence from the euroarea and the UK," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 326-341.
    19. Meixing DAI, 2009. "On the role of money growth targeting under inflation targeting regime," Working Papers of BETA 2009-11, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    20. Barthélemy, Jean & Clerc, Laurent & Marx, Magali, 2011. "A two-pillar DSGE monetary policy model for the euro area," Economic Modelling, Elsevier, vol. 28(3), pages 1303-1316, May.

    More about this item

    Keywords

    Bayesian Model Averaging; cointegration; Granger causality; monetary aggregates; monetary policy; real-time data; strong exogeneity;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rbp:wpaper:2017-003. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Research Unit (email available below). General contact details of provider: https://edirc.repec.org/data/bcrgvpe.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.