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

Author

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

Abstract

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.

Suggested Citation

  • Michal Andrle & Mr. Andrew Berg & Mr. Enrico G Berkes & Mr. Rafael A Portillo & Mr. Jan Vlcek & Mr. R. Armando Morales, 2013. "Money Targeting in a Modern Forecasting and Policy Analysis System: an Application to Kenya," IMF Working Papers 2013/239, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2013/239
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    References listed on IDEAS

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    9. Michal Andrle & Mr. Andrew Berg & Mr. R. Armando Morales & Mr. Rafael A Portillo & Mr. Jan Vlcek, 2013. "Forecasting and Monetary Policy Analysis in Low-Income Countries: Food and non-Food Inflation in Kenya," IMF Working Papers 2013/061, International Monetary Fund.
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    Cited by:

    1. Ms. Grace B Li & Mr. Stephen A. O'Connell & Mr. Christopher S Adam & Mr. Andrew Berg & Mr. Peter J Montiel, 2016. "VAR meets DSGE: Uncovering the Monetary Transmission Mechanism in Low-Income Countries," IMF Working Papers 2016/090, International Monetary Fund.
    2. García-Cicco, Javier, 2022. "Alternative monetary-policy instruments and limited credibility: An exploration," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 3(1).
    3. Mr. Rafael A Portillo & Ms. Yulia Ustyugova, 2015. "A Model for Monetary Policy Analysis in Uruguay," IMF Working Papers 2015/170, International Monetary Fund.
    4. Pei-Tha Gan, 2019. "Economic uncertainty, precautionary motive and the augmented form of money demand function," Evolutionary and Institutional Economics Review, Springer, vol. 16(2), pages 397-423, December.
    5. Karel Musil & Mikhail Pranovich & Mr. Jan Vlcek, 2018. "Structural Quarterly Projection Model for Belarus," IMF Working Papers 2018/254, International Monetary Fund.

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