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

 
Author/Editor: Michal Andrle ; Andrew Berg ; Enrico Berkes ; Rafael A Portillo ; Jan Vlcek ; R. Armando Morales
 
Publication Date: November 25, 2013
 
Electronic Access: Free Full text (PDF file size is 532KB).
Use the free Adobe Acrobat Reader to view this PDF file

 
Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
 
Summary: 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.
 
Series: Working Paper No. 13/239
Subject(s): Monetary policy | Kenya | Interest rates | Inflation targeting | Monetary aggregates | Demand for money | Low-income developing countries | Economic models

 
English
Publication Date: November 25, 2013
ISBN/ISSN: 9781475538007/2227-8885 Format: Paper
Stock No: WPIEA2013239 Pages: 44
Price:
US$18.00
 
 
Please address any questions about this title to publications@imf.org