## 2. Money Growth Target ## Source details **Canonical URL:** [2. Money Growth Target](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp13239.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp13239.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp13239.pdf.json) --- ### Definition and operational specification of the money growth target - Money growth target ∆Mt is defined as the forecast of the growth in the demand for nominal money balances at time t given the central bank’s forecast of inflation and real money demand, conditional on all available (t1) information. - Equation (5) (textual form): ∆Mt = Mt − Mt1 = Mtjt1 − Mt1 = ∆mR;tjt1 + tjt1. - Forecast for real money demand (consistent with interest rate implied by rule (4)): - ∆mR;tjt1 = !y ∆y tjt1 − !rs (rs R;tjt1 − rs t1) − ∆v tjt1 + !m bm t1 + "m d tjt1. (See eq. (6).) - Anticipated component of liquidity shock "m d tjt1 is included; this anticipated component is not interpreted as a shock to the monetary policy stance. ### Timing and commitment features of targets - Reserve money target is announced every quarter (period t set in period t1) and is not revised within that quarter. - Growth rate of targets accommodates past target misses under forward-looking specification (eq. (7)): - ∆MT;t = Mt − Mt1 = ∆Mt + (Mt1 − Mt1). - General money–target growth rule: - ∆M T;t = [(1 − M) ∆M T;t1 + M ∆MT;t] + (1 − ) ∆M. (See eq. (8).) - ∆M t = ∆M T;t − (Mt1 − Mt1). (See eq. (9).) - Parameter interpretations: - M < 1: targets react gradually (sluggish). - < 1: targets less responsive to new information; = 0 → Friedman rule (constant money growth). - Pair (M; ) captures institutional rigidities; incomplete accommodation of past misses when M < 1 or < 1. ### Consistency with interest rate rule - Exact adherence to (5)-(7) yields ex ante consistency between the money target and the interest rate rule (next period’s interest rate expectations signal the same stance). - Allowing M < 1 or < 1 can produce ex ante inconsistency between money target and interest rate rule, with implications for persistence of policy deviations. ### Combining money targeting and interest–rate rules (intermediate regimes) - Policy rate rs t modeled as convex combination of Taylor-rule-implied rate rs R;t and money-target-implied rate rs MT;t: - rs t = rs R;t + (1 − ) rs MT;t + d t. (See eq. (10).) - d t = 1 d t1 + "d t. (See eq. (11).) - Parameter nests polar cases: - = 1: pure Taylor rule (approximate inflation targeting). - = 0: pure money growth rule with full adherence to money targets. - 0 < < 1: mixed regime. - Alternative presentation (eq. (12)): - rs t = rs R;t + (1 − ) (1/!rs) (Mt − Mt) + ̃d t, where ̃d t = d t = d t. - Implication: < 1 implies systematic relation between money target misses (Mt − Mt) and policy stance; target misses may be i.i.d. forecast errors when = 1 and M = 1, or follow AR(1) with persistence (1 − M) if < 1 or M < 1. ### Policy-rule extremes and interest-rate form of strict money targeting - Under strict money targeting (Friedman rule), implied interest-rate rule (eq. (13)): - rs t = rs t1 + (1/!rs)(t − ̄) + (1/!rs)(∆y t − ∆y) − (1/!rs)(∆v t − ∆v) + !m/!rs ˆm t1 + (1/!rs) "m d t + d t. - Features of implied rule: - Greater persistence in interest rates. - Coefficients on output and inflation depend on !rs (short–term interest-rate elasticity of money demand). - Direct sensitivity to velocity and money demand shocks → potential amplification of macro volatility. ### Key model properties and comparative implications - Normalization: standard deviations in reported results are normalized to Friedman rule case ( = 0; = 0). - Main comparative findings: - Lower (more weight on money targeting) → larger variance of nominal exchange rate and interest rate across demand, supply, and money-demand shocks. - In extreme comparisons, interest rates and exchange rates can be "a hundred times more volatile" when money target adherence is complete ( = 0) than when money targets play no role ( = 1). - Type of money-targeting rule matters: forward-looking optimal money demand forecasting ( = 1 and M = 1) reduces costs of money–target–related policy errors relative to Friedman rule. - Supply shocks: greater adherence to money targets reduces inflation volatility but increases output volatility. - Aggregate demand shocks: adherence to money targets reduces impact on aggregate demand but increases inflation volatility via exchange-rate effects. - Policy implication: monetary policy is best specified as operating directly on the short-term interest rate rather than indirectly via monetary aggregates, since money-target adherence can introduce large interest-rate and exchange-rate volatility. ### Empirical application — Kenyan economy: institutional background and calibration - Institutional facts and policy context: - Official inflation target since December 2005: 5 percent with a tolerance of +/- 2 percent for year-on-year overall inflation. - Reserve money targets declared as de jure operational target; broad money (M3) as intermediate target; Central Bank Rate (CBR) intended to signal stance. - CBK repo operations maturity: 7–day; CBR used to guide interbank market rates since early 2011. - Short-term money-market volatility in late 2011 and early 2012: interbank market moved within a range of 11-30 percent (percent p.a.). - Inflation increased to about 20 percent during 2011 (from about 4 percent in mid 2010), before declining to less than 5 percent by end 2012. - Money demand and data patterns: - Two periods of rapid money growth: 2005:4–2008:2 and 2009:2–2011:1; slowdown during global financial crisis. - Real money and output growth comove (correlation about 0.5); money multipliers and velocity are volatile with large swings. - Reserve money deviations from targets have fluctuated between plus and minus ten percent of the quarterly level and display persistence. - VECM estimation (system: [∆M t; ∆M T;t] with error-correction term (Mt1 − Mt T;t1)): - Growth in money targets mainly driven by correction for previous target misses and by innovations; little role for lagged target growth. - Correction coefficient to past misses = 0.67 (target misses result in increase in growth rate of target that is less than one). - Implied calibration from VECM: = 0.7 and M = 1. - Evidence on whether money targets matter for Kenyan policy: - Multiple indicators suggest weak target adherence (1 − is very small in Kenya): - Large volatility of realized money growth suggests money-demand shocks largely accommodated. - Size and persistence of money-target misses suggest target adherence was not a policy priority. - Money targets do not depend on past money-target growth values or past target misses; instead, past misses steer growth rate of target. - Interest rates lack the quarter-to-quarter noise pattern expected under active money-target adherence. - Calibration chosen for Kenya: = 0.99 (very small role for money targets). - Under this calibration: a one percent increase in the money target miss results in a 7 basis points increase in interest rates. - By comparison: a one percentage increase in expected inflation results in an immediate increase in interest rates of 43 basis points, and a long run increase of 170 basis points. - Attempts to allow time-varying adherence were inconclusive; working assumption remains constant (very low) adherence. ### Model-based decomposition, role of shocks, and nowcasting - Decomposition of reserve-money target misses (model filtration): - Money target misses mainly driven by money-demand shocks (liquidity and velocity). - Monetary policy shocks contributed to target misses notably in 2010; business-cycle shocks contributed to lower-frequency movements. - Positive target misses in 2009:3–2011:1 coincided with interest rates below Taylor-implied rate → accommodative policy rather than strict target adherence. - Nowcasting performance and indicator value of monetary aggregates: - Monetary aggregates are immediately available and improve one-step-ahead nowcasts of output and inflation when combined with contemporaneous interest-rate, exchange-rate, and foreign variables. - Empirical nowcasting findings: - Inclusion of monetary aggregates lowers forecast uncertainty. - Confidence intervals shrink by 8 percent for CPI inflation and by 16 percent for output growth when conditioning on the indicator set (money, interest rate, exchange rate, foreign variables). - Money improves nowcasts but is not the sole driver; exchange rate is also an important high-frequency indicator. ### Conclusions and policy messages from the model and Kenyan application - Main conclusions: - Money targets are set forward-looking in the model but do not systematically drive policy unless adherence (1 − ) is substantial. - For Kenya, evidence and calibration point to very weak adherence to pre-announced money growth targets ( ≈ 0.99). - Strong adherence to pre-announced money growth targets increases volatility of macro variables—particularly money-market rates and exchange rates—because adherence transmits shocks into large short-run interest-rate responses. - Instability of money demand (volatile multipliers and velocity) and exogenous shocks make strict target adherence infeasible or costly. - Outcomes associated with money targeting can be achieved more safely via interest–rate–based policy that responds to inflation and output. - Monetary aggregates retain empirical value as timely indicator variables for nowcasting even when they do not drive policy. - Policy-relevant implications: - Modernizing toward interest-rate-based frameworks (inflation targeting / Taylor-rule-like regimes) can avoid large short-run volatility from strict money-target adherence. - If money targets are retained or used as operational forecasts, central banks should account for institutional rigidities (parameters M and ) and volatility of money demand when assessing adherence costs. - Improved liquidity-management operations and instruments can reduce policy implementation frictions that amplify interbank rate volatility. *Source: _wp13239 - 2. Money Growth Target* ### 2. Money Growth Target ### 2. Money Growth Target ### Definition and operational specification of the money growth target - The money growth target, ∆Mt, is defined as the forecast of the growth in the demand for nominal money balances at time t given the central bank’s forecast of inflation and real money demand, and conditional on all available (t1) information. (See eq. (5).) - Equation (5) (textual form): ∆Mt = Mt − Mt1 = Mtjt1 − Mt1 = ∆mR;tjt1 + tjt1. - The forecast for real money demand is specified consistent with the interest rate implied by the interest rate rule (4): - ∆mR;tjt1 = !y ∆y tjt1 − !rs (rs R;tjt1 − rs t1) − ∆v tjt1 + !m bm t1 + "m d tjt1. (See eq. (6).) - Part of the liquidity shock "m d t is anticipated by the central bank ("m d tjt1), reflecting additional information about liquidity patterns (weather, government financing, etc.). This anticipated component is not interpreted as a shock to the monetary policy stance. ### Timing and commitment features of targets - In the model, a reserve money target is announced every quarter (period t set in period t1) and is not revised within that quarter: bygones are bygones (the setting of Mt does not depend on past misses). This approximates but simplifies CBK practice, which usually revisits targets every six months. - The growth rate of targets, ∆M T;t, accommodates past target misses (Mt1 − Mt1) under the forward-looking specification (eq. (7)): ∆MT;t = Mt − Mt1 = ∆Mt + (Mt1 − Mt1). - For broader flexibility and to capture institutional persistence, the general money–target growth rule is: - ∆M T;t = [(1 − M) ∆M T;t1 + M ∆MT;t] + (1 − ) ∆M. (See eq. (8).) - ∆M t = ∆M T;t − (Mt1 − Mt1). (See eq. (9).) - Parameter interpretations: - M < 1: makes money target setting sluggish (targets react gradually). - < 1: makes money targets less responsive to new information; in the limit = 0 the rule becomes a Friedman rule (constant money growth). - The pair (M; ) captures institutional rigidities; incomplete accommodation of past misses occurs when M < 1 or < 1. ### Consistency with interest rate rule - If targets follow (5)-(7) exactly, there is ex ante consistency between the money target and the interest rate rule: the money target and expectations of next period’s interest rates signal the same policy stance. - Allowing M < 1 or < 1 produces possible ex ante inconsistency between the money target and the interest rate rule, with implications for the persistence of policy deviations. --- ### Combining money targeting and interest–rate rules (intermediate regimes) - The actual policy rate rs t is modeled as a convex combination of the Taylor-rule-implied rate rs R;t and the rate implied by strict adherence to the money target rs MT;t: - rs t = rs R;t + (1 − ) rs MT;t + d t. (See eq. (10).) - d t = 1 d t1 + "d t. (See eq. (11).) - Parameter nests polar cases: - = 1: pure Taylor rule (approximate inflation targeting). - = 0: pure money growth rule with full adherence to money targets. - 0 < < 1: mixed regime. - Alternative presentation (eq. (12)): - rs t = rs R;t + (1 − ) (1/!rs) (Mt − Mt) + ̃d t, - where ̃d t = d t = d t. - Implication: < 1 implies a systematic relation between money target misses (Mt − Mt) and the policy stance (deviations of rs t from rs R;t). Depending on (M; ), target misses may be i.i.d. forecast errors (when = 1 and M = 1) or follow an AR(1) with persistence (1 − M) if < 1 or M < 1. --- ### Policy-rule extremes and interest-rate form of strict money targeting - Under strict money targeting (Friedman rule) and inserting the money target into money demand, the implied interest-rate rule is: - rs t = rs t1 + (1/!rs)(t − ̄) + (1/!rs)(∆y t − ∆y) − (1/!rs)(∆v t − ∆v) + !m/!rs ˆm t1 + (1/!rs) "m d t + d t. (See eq. (13).) - Features of this implied rule: - Greater persistence in interest rates. - Coefficients on output and inflation depend on the short–term interest-rate elasticity of money demand (!rs). - Direct sensitivity to changes in velocity and money demand shocks, which can amplify macro volatility. --- ### Key model properties and comparative implications - Normalization benchmark: standard deviations in reported results are normalized to the Friedman rule case ( = 0; = 0). - Main comparative findings: - The more weight placed on money targeting (lower ), the larger the variance of the nominal exchange rate and the interest rate across demand, supply, and money-demand shocks. - In extreme comparisons, interest rates and exchange rates can be "a hundred times more volatile" when money target adherence is complete ( = 0) than when money targets play no role ( = 1). - Type of money-targeting rule (Friedman rule versus optimal money demand forecasting with = 1 and M = 1) matters for the economy’s response to money-demand shocks: optimal money demand forecasting reduces the costs of money–target–related policy errors relative to the Friedman rule. - Under supply shocks, greater adherence to money targets reduces inflation volatility but increases output volatility (trade-off driven by required interest-rate responses to clear money markets). - Under aggregate demand shocks, adherence to money targets reduces the impact on aggregate demand but increases inflation volatility through exchange-rate effects. - Policy implication emphasized: monetary policy is best specified as operating directly on the short-term interest rate (the variable through which policy affects the real economy), rather than indirectly via monetary aggregates, because money-target adherence can introduce large interest-rate and exchange-rate volatility. --- ### Empirical application — Kenyan economy: institutional background and model calibration - Institutional facts and policy context: - Since December 2005 the official inflation target is 5 percent with a tolerance of +/- 2 percent for year-on-year overall inflation. - Reserve money targets are declared as the de jure operational target; broad money (M3) is an intermediate target; the Central Bank Rate (CBR) is intended to signal the stance. - CBK repo operations have a 7–day maturity; CBK began using the CBR to guide interbank market rates since early 2011. - Short-term money-market volatility in late 2011 and early 2012: interbank market moved within a range of 11-30 percent (percent p.a.). - Inflation increased to about 20 percent during 2011, from about 4 percent in mid 2010, before declining to less than 5 percent by end 2012. - Money demand and data patterns in Kenya: - Two periods of rapid money growth: 2005:4–2008:2 and 2009:2–2011:1; slowdown during the global financial crisis. - Real money and output growth show comovement (correlation about 0.5), but money multipliers and velocity are volatile and have large swings. - Reserve money deviations from targets have fluctuated between plus and minus ten percent of the quarterly level of reserve money and display persistence. - VECM estimation of money/target relation (system: [∆M t; ∆M T;t] with error-correction term (Mt1 − Mt T;t1)): - Growth in money targets is mainly driven by correcting for previous target misses and by innovations; little role for lagged target growth. - Correction to past misses is less than complete: the estimated correction coefficient = 0.67 (i.e., target misses result in an increase in the growth rate of target that is less than one). - Rewriting the targeting rule yields implied parameter estimates used for calibration: = 0.7 and M = 1. (VECM results imply these parameter values.) - Evidence on whether money targets matter for Kenyan monetary policy: - Multiple empirical indicators suggest weak target adherence (1 − is very small in Kenya): - Large volatility of realized money growth suggests money-demand shocks were largely accommodated. - Size and persistence of money-target misses suggest target adherence was not a policy priority. - Money targets do not depend on past money-target growth values or past target misses; instead, past misses steer the growth rate of the target. - Interest rates do not display the quarter-to-quarter noise pattern that would be expected under active money-target adherence. - Calibration chosen for Kenya: = 0.99 (very small role for money targets). - Under this calibration: a one percent increase in the money target miss results in a 7 basis points increase in interest rates. - By comparison: a one percentage increase in expected inflation results in an immediate increase in interest rates of 43 basis points, and a long run increase of 170 basis points. - Attempts to allow for time-varying adherence (e.g., one-quarter vs two-quarter ahead targets) were inconclusive given sample size and outliers; the working assumption remains constant (very low) adherence. --- ### Model-based decomposition, role of shocks, and nowcasting - Decomposition of reserve-money target misses (model filtration): - Model-based results indicate that money target misses were mainly driven by money-demand shocks (liquidity and velocity). - Monetary policy shocks contributed to target misses notably in 2010; business-cycle shocks played a smaller role (contributing to lower-frequency movements). - Periods of positive target misses in 2009:3–2011:1 coincided with interest rates being below the Taylor-implied rate, consistent with accommodative policy rather than strict target adherence. - Nowcasting performance and indicator value of monetary aggregates: - Monetary aggregates are immediately available and can improve one-step-ahead nowcasts of output and inflation when combined with contemporaneous interest-rate, exchange-rate, and foreign variables. - Empirical nowcasting exercise findings: - Inclusion of monetary aggregates lowers forecast uncertainty. - Confidence intervals shrink by 8 percent for CPI inflation and by 16 percent for output growth when conditioning on the set of indicators (money, interest rate, exchange rate, foreign variables). - Money improves nowcasts but is not the sole driver; exchange rate is also an important high-frequency indicator. --- ### Conclusions and policy messages drawn from the model and Kenyan application - Main conclusions: - Money targets in the model are set in a forward-looking manner but do not necessarily play a systematic role in policy unless adherence (1 − ) is substantial. - For Kenya, empirical evidence and model calibration point to very weak adherence to pre-announced money growth targets ( ≈ 0.99). - Strong adherence to pre-announced money growth targets leads to increased volatility of macro variables—particularly money-market rates and exchange rates—because money-target adherence transmits shocks into large short-run interest-rate responses. - Instability of money demand (volatile multipliers and velocity) and exogenous shocks make strict target adherence infeasible or costly. - If authorities prefer outcomes associated with money targeting (e.g., relative variance properties under supply shocks), those outcomes can be achieved more safely via an interest–rate–based policy that responds appropriately to inflation and output. - Monetary aggregates retain empirical value as timely indicator variables for nowcasting even when they do not drive monetary policy. - Policy-relevant implications: - Modernizing toward interest-rate-based frameworks (inflation targeting / Taylor-rule-like regimes) can avoid the large short-run volatility introduced by strict money-target adherence. - Where money targets are retained (or used as operational forecasts), central banks should account for institutional rigidities (parameters M and ) and the volatility of money demand when assessing the costs of adherence. - Improved liquidity-management operations and instruments can reduce policy implementation frictions that otherwise amplify interbank rate volatility. *Source: _wp13239 - 2. Money Growth Target* ### REFERENCES ### _wp13239 - REFERENCES ### References cited - M. Andrle, A. Berg, R. Morales, R. Portillo, and J. Vlcek. Forecasting and policy analysis in low-income countries (1): Food and non–food inflation in kenya. Working Paper WP/13/61, International Monetary Fund, 2013. - J. Benes, A. Berg, R. Portillo, and D. Vavra. Modeling sterilized interventions and balance sheet effects of monetary policy in a new-keynesian framework. Working Paper WP/13/11, International Monetary Fund, 2013. - A. Berg and R. Portillo. Regional Economic Outlook, Sub-Saharan Africa, chapter Monetary and Exchange Rate Policies in Sub-Saharan Africa. IMF, Washington D.C., April 2008. - A. Berg, R. Portillo, and D.F. Unsal. On the optimal adherence to money targets in a new-keynesian framework: An application to low-income countries. Working Paper WP/10/134, International Monetary Fund, 2010. - Andrew. Berg, L. Charry, R. Portillo, and J. Vlcek. The monetary transmission mechanism in the tropics: A narrative approach. Working Paper WP/13/197, International Monetary Fund, 2013. - U. Bindseil. Monetary Policy Implementation – Theory, Past and Present. Oxford UP, New York, 2004. - C.E.V Borio. Monetary policy operating procedures in industrial countries. Working Paper, March 40, Bank for International Settlements, 1997. - CBK. Monetary policy statement. Technical Report December, Central Bank of Kenya, 2011. - CBK. Monetary policy statement. Technical Report June, Central Bank of Kenya, 2012. - Kevin Clinton, Jihad Dagher, Ondra Kamenik, Douglas Laxton, Ali Alichi, and Marshall Mills. A model for full-fledged inflation targeting and application to ghana. IMF WP 10/25, IMF, 2010. - G. Coenen, A. Levin, and V. Wieland. Data uncertainty and the role of money as an information variable for monetary policy. European Economic Review, 49:975–1006, 2005. - Hamid. Davoodi, S O’Connell, R. Portillo, and J. Vlcek. A forecasting and monetary policy analysis framework for tanzania. Working Paper forthcoming, International Monetary Fund, 2013. - P. Disyatat. Monetary policy implementation: Misconceptions and their consequences. Working Paper December, No. 269, Bank for International Settlements, 2008. - B. Friedman. Targets and instruments of monetary policy. Working Paper 2668, National Bureau of Economic Research, 1988. - S.T. Gray. Central bank balances and reserve requirements. Technical Report February, WP/11/36, IMF, 2011. - IMF. Kenya: 2011 article iv consultation, second review under the three-year arrangement under the extended credit facility and request for modification of performance criteria and augmentation of access, staff report; press release. IMF Country Report January, 12/14, International Monetary Fund, 2012. - B.T. McCallum. Robustness properties of a rule for monetary policy. Carnegie-Rochester Conference Series on Public Policy, 29:173–204, 1998. - N. Ndung’u. International conference on monetary policy frameworks in developing countries: Practice and challenges – kenya’s experience. Technical Report July 20, Central Bank of Kenya, (Kigali, Rwanda), 2012. - W. Poole. Optimal choice of monetary policy instrument in a simple stochastic macro model. Quarterly Journal of Economics, 84(2):197–216, 1970. - W.A. Razzak. Is the taylor rule really different from the mccallum rule? Contemporary Economic Policy, 21(4):445–457, 2003. - A.A. Selassie, B. Clements, S. Tareq, J.K. Martijn, and G. Di Bella. Designing monetary and fiscal policy in low–income countries. Occasional Paper 250, International Monetary Fund, 2006. - C.E. Walsh. Monetary Theory and Policy. MIT Press, Cambridge, MA, 2001. ### Key quantitative tables and notes (selected) - Table 1: Standard Deviations - Presents standard deviations from simulations under subsets of shocks: Demand shocks (IS equation), Supply shocks (Phillips curves for food and non-food inflation), Money demand shocks (liquidity and velocity). - Includes policy specifications: - Friedman Rule ( = 0; = 0) — standard deviations displayed in absolute terms. - Forward–looking rules ( = 1;  M = 1) — other results presented relative to Friedman Rule. - Representative numeric entries (preserved exactly as in source): - Demand Shocks Absolute Standard Deviations — Friedman Rule ( = 0; = 0): 4.8 0.3 0.8 7.5 - Forward–looking rules ( = 1;  M = 1): Relative to Friedman Rule = 0 1.0 1.0 1.0 1.0 - Examples for other parameterizations (verbatim): =0:25 0.8 0.8 1.0 0.8; =0:5 0.5 0.6 1.1 0.6; =0:75 0.3 0.4 1.2 0.3; =1 0.0 0.5 1.3 0.0 - Supply Shocks Absolute Standard Deviations — Friedman Rule ( = 0; = 0): 2.4 1.3 0.8 6.2 - Money Demand Shocks Absolute Standard Deviations — Friedman Rule ( = 0; = 0): 1.0 0.3 0.2 1.9 - Note: The table caption explains the mapping of shocks to model equations and the presentation convention. - Table 2: Standard Deviations (regression-style coefficients) - Columns: ∆M t and ∆ ̄ M T;t with Coeff. and t stat. - Selected entries preserved: - Constant 0.015 2.99 | 0.010 1.82 - ∆M t1 0.187 1.03 | -0.131 0.64 - ∆ ̄ M T;t1 0.034 0.30 | -0.048 0.38 - M t1 ̄ M T;t1 0.054 0.44 | 0.667 4.81 - R 2 0.063 0.395 - Corr(e M;t ; e  M;t ) 0.375 - Number of obs: 56 - Table 3: Calibration of the Money Block Parameters - Key parameter values preserved exactly: - Money Demand: ! y Elasticity to real output growth 1.00; ! rs Elasticity to nom. interest rate changes 0.56; ! m Elasticity to real money gap 0.34; const Money demand constant 1248.00; y Elasticity to real output 1.00; rs Elasticity to nom. interest rates 0.02 - Velocity:  v Autoregressive parameter 0.25; v Steady state growth -0.5 - Hybrid Policy Rule: Weight on the Taylor rule implied rate 0.99 - Money Target: Weight on expected money demand 0.7;  ^ M Speed of money target adjustments 1 - Taylor Rule: 1 Interest rate smoothing 0.80; 2 MP sensitivity to inflation deviations 1.40; 3 MP sensitivity to the output gap 0.00; 4 MP sensitivity to nom. appreciation 0.25 - Table 4: Calibration of Standard Deviations (STD) of Shocks - Shock descriptions and STDs preserved: - Money Demand " md Liquidity shock 0.50 - " md tjt1 Expected money demand shock 1.00 - Velocity " v Velocity shock 0.50 - Hybrid Policy Rule " d MP shock 0.30 - Table 5: Reserve Money Data - Variables listed: - M Reserve Money (billions of KES) — Data source: CBK — Remarks: Monetary Policy Statements - M Reserve Money Targets (billions of KES) — Data source: CBK — Remarks: Monetary Policy Statements ### Appendix summaries: theory, calibration, and data - Appendix I — A Bestiary of Money Growth Rules - Describes classes of money growth rules: - Strict money growth rules (Friedman rule): constant growth rate for money consistent with steady-state growth and inflation target; equation (A1): ∆M t = ∆M t =(∆y t +  t )+ ∆v t - Endogenous money growth rule with full adherence: target ∆M t = ∆ M t set in response to inflation deviations and the business cycle; example equation (A2) (variant of McCallum rule): ∆M t = ∆ M t =∆y t +  t + v t (  ( 4;cpi t+i  4;cpi t+i )+ y ˆy t ) + " m s t - Money growth targeting with partial adherence: announced target abandoned to smooth money market interest rates (discussed with reference to [Berg et al., 2010]). - Note: Clarifies isomorphism between money growth rules and Taylor-type interest rate rules. - Appendix II — Calibration of the Model - Parameters calibrated to Kenyan economy using Table 3 and Table 1. - Calibration approach: adaptive strategy relying on observed data and expert knowledge; historical data filtration and economic intuition used to determine parameter values. - Appendix III — Data - Data usage: "We use data described in [1]. Additional data related to the money block in the model are described in Table 5. Data are seasonally adjusted." - Appendix IV — Impulse Response Functions - Figures described: - Figure 12: Domestic demand shock — impulse responses for Output Gap, Inflation q/q, Policy Rate, Exchange rate growth q/q annualized plotted for parameter sets gamma=1; gamma=0.6,alpha=1; gamma=0.6,alpha=0.5. - Figure 13: Money demand (liquidity) shock — impulse responses for Output Gap, Inflation q/q, Policy Rate, Exchange rate growth q/q annualized plotted for parameter sets gamma=1; gamma=0.6,alpha=1; gamma=0.6,alpha=0.5. - Visual axes and numeric tick marks preserved in figures as presented in source (e.g., horizontal axis 0 5 10 15 20; vertical axes showing numeric ranges including small decimals and negative values). *Source: _wp13239 - REFERENCES* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp13239.pdf_