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

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  • Jean Mercenier
  • Khalid Sekkat

Abstract

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.

Suggested Citation

  • Jean Mercenier & Khalid Sekkat, 1988. "Money stock targeting and money supply: an intertemporal optimization approach, with an application to Canada," ULB Institutional Repository 2013/7304, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:ulb:ulbeco:2013/7304
    Note: SCOPUS: ar.j
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    Cited by:

    1. Robert A. Amano & Tony S. Wirjanto, "undated". "A Further Analysis of Exchange Rate Targeting in Canada," Staff Working Papers 94-2, Bank of Canada.
    2. Robert A. Amano & Tony S. Wirjanto, "undated". "The Dynamic Behaviour of Canadian Imports and the Linear-Quadratic Model: Evidence Based on the Euler Equation," Staff Working Papers 94-6, Bank of Canada.

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