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

Author

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

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

  • Mr. R. Armando Morales & Mr. Andrew Berg & Mr. Rafael A Portillo & Michal Andrle & Mr. Jan Vlcek & Mr. Enrico G Berkes, 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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    1. Jaromir Benes & Andrew Berg & Rafael Portillo & David Vavra, 2015. "Modeling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New-Keynesian Framework," Open Economies Review, Springer, vol. 26(1), pages 81-108, February.
    2. 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.
    3. Mr. Andrew Berg & Mr. Rafael A Portillo & Ms. Filiz D Unsal, 2010. "On the Optimal Adherence to Money Targets in a New-Keynesian Framework: An Application to Low-Income Countries," IMF Working Papers 2010/134, International Monetary Fund.
    4. Mr. Simon T Gray, 2011. "Central Bank Balances and Reserve Requirements," IMF Working Papers 2011/036, International Monetary Fund.
    5. 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.).
    6. Mr. R. Armando Morales & Mr. Andrew Berg & Mr. Rafael A Portillo & Michal Andrle & 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.
    7. 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.
    8. William Poole, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, Oxford University Press, vol. 84(2), pages 197-216.
    9. Bindseil, Ulrich, 2004. "Monetary Policy Implementation: Theory, past, and present," OUP Catalogue, Oxford University Press, number 9780199274543.
    10. Mr. Douglas Laxton & Jihad Dagher & Mr. Ondrej Kamenik & Ali Alichi & Kevin Clinton & Marshall Mills, 2010. "A Model for Full-Fledged Inflation Targeting and Application to Ghana," IMF Working Papers 2010/025, International Monetary Fund.
    11. Mr. Andrew Berg & Mr. Rafael A Portillo & Mr. Jan Vlcek & Ms. Luisa Charry, 2013. "The Monetary Transmission Mechanism in the Tropics: A Narrative Approach," IMF Working Papers 2013/197, International Monetary Fund.
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    Cited by:

    1. Bin Grace Li & Stephen A. O'Connell & Christopher S Adam & Andrew Berg & 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. Rafael A Portillo & Yulia Ustyugova, 2015. "A Model for Monetary Policy Analysis in Uruguay," IMF Working Papers 2015/170, International Monetary Fund.

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