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Money Targeting in a Modern Forecasting and Policy Analysis System: an Application to Kenya

  • Michal Andrle
  • Andrew Berg
  • Enrico Berkes
  • Rafael A Portillo
  • Jan Vlcek
  • R. Armando Morales

We extend the framework in Andrle and others (2013) to incorporate an explicit role for money targets and target misses in the analysis of monetary policy in low-income countries (LICs), with an application to Kenya. We provide a general specification that can nest various types of money targeting (ranging from targets based on optimal money demand forecasts to those derived from simple money growth rules), interest-rate based frameworks, and intermediate cases. Our framework acknowledges that ex-post adherence to targets is in itself an objective of policy in LICs; here we provide a novel interpretation of target misses in terms of structural shocks (aggregate demand, policy, shocks to money demand, etc). In the case of Kenya, we find that: (i) the setting of money targets is consistent with money demand forecasting, (ii) targets have not played a systematic role in monetary policy, and (iii) target misses mainly reflect shocks to money demand. Simulations of the model under alternative policy specifications show that the stronger the ex-post target adherence, the greater the macroeconomic volatility. Our findings highlight the benefits of a model-based approach to monetary policy analysis in LICs, including in countries with money-targeting frameworks.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/239.

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Length: 44
Date of creation: 25 Nov 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/239
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  1. Jaromir Benes & Andrew Berg & Rafael A Portillo & David Vavra, 2013. "Modeling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New-Keynesian Framework," IMF Working Papers 13/11, International Monetary Fund.
  2. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
  3. Coenen, Günter & Levin, Andrew T. & Wieland, Volker, 2001. "Data uncertainty and the role of money as an information variable for monetary policy," Working Paper Series 0084, European Central Bank.
  4. Simon Gray, 2011. "Central Bank Balances and Reserve Requirements," IMF Working Papers 11/36, International Monetary Fund.
  5. Michal Andrle & Andrew Berg & R. Armando Morales & Rafael Portillo & Jan Vlcek, 2013. "Forecasting and Monetary Policy Analysis in Low-Income Countries: Food and non-Food Inflation in Kenya," IMF Working Papers 13/61, International Monetary Fund.
  6. W. A. Razzak, 2003. "Is the Taylor Rule Really Different from the McCallum Rule?," Contemporary Economic Policy, Western Economic Association International, vol. 21(4), pages 445-457, October.
  7. Andrew Berg & Luisa Charry & Rafael A Portillo & Jan Vlcek, 2013. "The Monetary Transmission Mechanism in the Tropics: A Narrative Approach," IMF Working Papers 13/197, International Monetary Fund.
  8. Bindseil, Ulrich, 2004. "Monetary Policy Implementation: Theory, past, and present," OUP Catalogue, Oxford University Press, number 9780199274543.
  9. Kevin Clinton & Jihad Dagher & Ondra Kamenik & Douglas Laxton & Ali Alichi & Marshall Mills, 2010. "A Model for Full-Fledged Inflation Targeting and Application to Ghana," IMF Working Papers 10/25, International Monetary Fund.
  10. Andrew Berg & D. Filiz Unsal & Rafael Portillo, 2010. "On the Optimal Adherence to Money Targets in a New-Keynesian Framework: An Application to Low-Income Countries," IMF Working Papers 10/134, International Monetary Fund.
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