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Money in the era of inflation targeting

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Abstract

This paper provides evidence that the relationship between inflation and money growth has changed as the inflation-targeting regime has progressed. During the disinflation period (mid 1980s to mid or late 1991) the correlation between inflation and money aggregates was fairly consistent with the prediction of theory. Both inflation and money growth fell sharply. In 1992, inflation was stabilised around an average of little less than 2 per cent. Since then, the correlation between money growth and inflation has been fairly weak at the permanent (trend) and the business cycle frequencies. By contrast, there is a significant correlation between money and real GDP over the business cycle. As far as base velocity is concerned, it was stable up until December 1997, but broke down in late 1998. As money growth took off in the late 1990s, velocity declined rather sharply, but these downward trends are consistent with the decline of interest rates as predicted by the quantity theory of money. The demand for real-monetary base is well behaved and interest inelastic, but this relationship also broke down in late 1998. However, both velocity-interest rate and money demand function breakdown is probably only temporary. Finally, at least until March 1999, the rate of growth of the monetary base has, on average, been consistent with a nominal GDP targeting policy of 4 per cent.

Suggested Citation

  • W A Razzak, 2001. "Money in the era of inflation targeting," Reserve Bank of New Zealand Discussion Paper Series DP2001/02, Reserve Bank of New Zealand.
  • Handle: RePEc:nzb:nzbdps:2001/02
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    Cited by:

    1. Saten Kumar & Don J. Webber, 2013. "Australasian money demand stability: application of structural break tests," Applied Economics, Taylor & Francis Journals, vol. 45(8), pages 1011-1025, March.
    2. Philip Gunby & Stephen Hickson, 2016. "Is Cash Dead? Using Economic Concepts To Motivate Learning and Economic Thinking," Working Papers in Economics 16/30, University of Canterbury, Department of Economics and Finance.
    3. Philip Liu, 2004. "Improving implementation of inflation targeting in New Zealand: an investigation of the Reserve Bank's inflation errors," Reserve Bank of New Zealand Discussion Paper Series DP 2004/06, Reserve Bank of New Zealand.
    4. Francisco Rosende R., 2004. "El marco teórico de la política monetaria," Revista de Analisis Economico – Economic Analysis Review, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines, vol. 19(2), pages 85-117, December.
    5. Jorge Hermann & Rómulo Chumacero, 2005. "No Estaba Muerta, ...: La Teoría Cuantitativa y la Relación entre Dinero e Inflación," Working Papers Central Bank of Chile 324, Central Bank of Chile.
    6. Nicholas Rowe, 2002. "How to Improve Inflation Targeting at the Bank of Canada," Staff Working Papers 02-23, Bank of Canada.
    7. Abbas Valadkhani, 2003. "Long and Short-Run Determinants of Money Demand in New Zealand: Evidence from Cointegration Analysis," School of Economics and Finance Discussion Papers and Working Papers Series 132, School of Economics and Finance, Queensland University of Technology.
    8. Jose De Gregorio, 2004. "Rapid Growth Of Monetary Aggregates And Inflation: The International Evidence," Working Papers Central Bank of Chile 256, Central Bank of Chile.
    9. Jose de Gregorio R., 2003. "Money and Inflation: Where do we Stand?," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 6(1), pages 5-19, April.
    10. Gancho Todorov Ganchev, 2010. "On the Utility of Money," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 32-60.
    11. Francisco Rosende & Matías Tapia, 2006. "La Caída de la Inflación en Chile: Políticas, Instituciones y Suerte," Documentos de Trabajo 308, Instituto de Economia. Pontificia Universidad Católica de Chile..
    12. Jose De Gregorio, 2003. "Dinero e Inflación: ¿En Qué Estamos?," Working Papers Central Bank of Chile 201, Central Bank of Chile.
    13. Abbas Valadkhani, 2002. "Long- and short-run determinants of the demand for money in New Zealand: A cointegration analysis," New Zealand Economic Papers, Taylor & Francis Journals, vol. 36(2), pages 235-250.
    14. Chris Bloor & Chris Hunt & Tim Ng & Hamish Pepper, 2008. "The use of money and credit measures in contemporary monetary policy," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 71, March.
    15. Francisco Rosende, 2003. "Conducción de la Política Monetaria," Documentos de Trabajo 247, Instituto de Economia. Pontificia Universidad Católica de Chile..

    More about this item

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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