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Money growth rule and macro-financial stability under inflation-targeting regime

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  • Meixing DAI
  • Moïse SIDIROPOULOS

Abstract

Recent financial crises and central banks’ interventions to ensure liquidity on the monetary markets around the world have shown that using interest rate as instrument of monetary policy can be insufficient. Using an aggregate dynamic macro-economic model, we study how to combine inflation targeting with monetary targeting to warrant macro-economic and financial stability. A commitment to a long-run money growth rate corresponding to the inflation target could reinforce the credibility of central bank announcements and the role of inflation target as strong and credible nominal anchor for private inflation expectations. We show that, using Friedman’s k-percent money growth rule to help anchoring inflation expectations under inflation-targeting regime can generate dynamic instability in output, inflation, assets prices as well as real money demand. Alternatively, a well-specified monetary targeting rule that responds negatively to the evolution of expected inflation allows achieving macro-economic and financial stability.

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Bibliographic Info

Paper provided by Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg in its series Working Papers of BETA with number 2009-05.

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Date of creation: 2009
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Handle: RePEc:ulp:sbbeta:2009-05

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Keywords: inflation targeting; monetary targeting; stock prices; macro-economic and financial stability; Friedman’s k-percent money growth rule.;

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Cited by:
  1. Dai, Meixing, 2009. "On the role of money growth targeting under inflation targeting regime," MPRA Paper 13780, University Library of Munich, Germany.

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