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Money stock targeting and money supply: an intertemporal optimization approach, with an application to Canada

Listed author(s):
  • Jean Mercenier
  • Khalid Sekkat

We propose a model of the short‐term behaviour of the monetary authorities of a small open economy that is willing to stabilize, to some extent, its bilateral exchange rate vis‐à‐vis a dominant partner. The optimal money supply strategy is derived using intertemporal optimization arguments, in a rational expectations environment, The model is formulated so as to avoid the time inconsistency problem stressed by Kydland and Prescott (1977). It allows econometric estimation of the optimal money supply rule as well as of the parameters of the intertemporal utility function, and of the function that defines the intermediate target money stock. The model is successfully estimated on Canadian quarterly data, using maximum‐likelihood techniques. Copyright © 1988 John Wiley & Sons, Ltd.

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Paper provided by ULB -- Universite Libre de Bruxelles in its series ULB Institutional Repository with number 2013/7304.

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Date of creation: 1988
Publication status: Published in: Journal of Applied Econometrics (1988) v.3 n° 3,p.215-228
Handle: RePEc:ulb:ulbeco:2013/7304
Note: SCOPUS: ar.j
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