## _wp15136 - 4. Transmission Channels

## Source details

**Canonical URL:** [_wp15136 - 4. Transmission Channels](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp15136.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp15136.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp15136.pdf.json)

---

### I. Introduction
- “almost all central banks around the world are legally obliged to pursue price stability as one of their primary objectives.”
- Laurens and others (2009) survey: "95 percent" of 181 countries had price stability as one of the primary objectives of monetary policy; when central banks had multiple objectives, price stability typically was given priority.
- Central bank independence scores (higher numbers equals more independence, maximum of 1):
  - AFR: 0.33 (1980s) and 0.53 (2003)
  - APD: 0.30 (1980s) and 0.63 (2003)
  - EUR: 0.30 (1980s) and 0.88 (2003)
  - MCD: 0.30 (1980s) and 0.53 (2003)
  - WHD: 0.36 (1980s) and 0.67 (2003)
  - All: 0.32 (1980s) and 0.68 (2003)
- Paper objectives:
  - Provide a conceptual framework accounting for key features of monetary policy regimes in evolving countries.
  - Offer principles for effective monetary policy given countries' initial conditions.
  - Map progress and ways to anchor monetary policy during the "Journey to IT."
- IMF program implication highlighted: introduce a Monetary Policy Consultation Clause instead of numerical targets on reserve money or net domestic assets as "performance criteria."

### II. Choice of a Framework — General Considerations
- A well-specified framework requires:
  - A well-defined policy objective (typically inflation).
  - Clarity on intermediate and operational targets.
  - Specification of monetary policy instruments.
- Key conceptual elements (definitions preserved):
  - Policy objective: the final goal (typically the rate of inflation).
  - Intermediate target: variable correlated with objective (examples: exchange rate, monetary aggregate; under IT: the inflation forecast).
  - Operational target: variable central bank can sufficiently control (examples: reserve money, commercial bank reserve balances, short-term money market interest rate, exchange rate).
  - Instruments: tools fully controlled by central bank (examples: OMOs, standing facilities, reserve requirements).
  - Nominal anchor: numerical objective on a nominal variable (examples: inflation measure, nominal exchange rate, growth rate of monetary aggregate).
- Contrasting MT and IT key features (preserved):
  - Monetary Targeting (MT):
    - Main Instruments: OMOs, standing facilities, reserve requirement
    - Operational Target: Reserve money 1/
    - Intermediate Target: Broad monetary aggregate
    - Policy Objective: Inflation (implicit)
  - Inflation Targeting (IT):
    - Main Instruments: OMOs, standing facilities, reserve requirement
    - Operational Target: Interest rates
    - Intermediate Target: Inflation forecast
    - Policy Objective: Inflation (explicit)
  - Footnote preserved: "1/ Until the 1980s, several central banks in advanced countries (in particular Germany and Canada) relied on short-term interest rates to achieve the intermediate target."
- Appropriate regime depends on:
  - Political and economic institutions.
  - Main transmission channels.
  - Technical capacity of monetary authorities.
  - Macrofinancial conditions.
- Financial market development implications:
  - Shallow markets, low intermediation, and high inflation historically favored MT.
  - Deep markets and strong interest-rate transmission favor interest-rate operating procedures and IT.
- MT advantages: clearer timing/triggers due to control over reserve money.
- IT challenges: variable lags require stronger communication, transparency, and accountability.

### II. Choice of a Framework — Evolving Monetary Regimes (analysis and policy implications)
- Key analytical points:
  - Neither MT nor IT may be immediately suitable for countries with evolving monetary regimes.
  - MT can discipline during early disinflation with flexible exchange rates; as inflation falls, money multiplier/velocity relationships weaken.
  - Some countries cannot credibly commit to a numerical inflation target within a fixed policy horizon.
  - Moving to a framework with an inflation objective central—emphasizing analysis over rigid money rules—is reasonable given evolving infrastructures.
- Policy trade-offs and recommended approach:
  - Strengthen interest rate and expectations transmission while maintaining an effective nominal anchor for inflation expectations.
  - For Fund-supported programs, monetary conditionality resembling MT may be necessary to safeguard resources but can limit modernization.
  - Preferable operational approaches:
    - Formulate and monitor policy using multiple indicators.
    - Introduce forward-looking analytical tools.
    - Reduce reliance on rigid policy rules.
    - Increase weight on discretion and judgement.
- Transition dynamics:
  - The "Journey to IT" is likely to be long due to structural transformation, capacity building, data needs, and time to strengthen transmission.
  - Transitional regimes can build confidence in analytical and operational tools.
  - Gradualism may be warranted; transition to IT can commence before all pre-conditions are met provided clear commitment to full implementation (IMF, 2014b).
- Role of monetary aggregates:
  - Varies by country: from quantitative targets to indicators supplementing short-term risk assessments to price stability.
  - Monetary analysis (including credit counterparts) should cross-check other information rather than mechanically set numerical reserve money targets.

### Key operational principles for evolving monetary regimes
- Money and credit information should not be excluded a priori from monetary policy or financial stability analysis (Trichet, 2013).
- Exchange rate:
  - Some exchange rate subordination (“flexibility”) is necessary to allow monetary policy independence.
  - Allow short- and medium-term nominal exchange rate fluctuations; increase understanding of exchange rate pass-through.
  - Articulate a clear intervention strategy in foreign exchange markets.
- Interest rates:
  - Operationally, monetary policy is about setting appropriate interest rate levels; true during transition.
  - Avoid rigid reserve money rules in transition to prevent volatile/overshooting interest rates.
- Communication:
  - Essential to anchor inflation expectations in evolving regimes.
  - Cover key macro variables and monetary policy implementation aligned with actual policy practice; focus on what matters for private sector behavior (interest rates and future inflation).
  - May require raising general financial literacy.

### Transitional challenges for evolving regimes
- Three main challenges:
  - Insulate central bank from fiscal pressures to protect independence, especially where government securities markets are undeveloped.
  - Develop liquidity management operating procedures to minimize short-run volatility in shallow money markets.
  - Find information variables and analytical tools to guide near-term policy amid data gaps.

### When reserve money targeting (RMP) is useful
- RMP as a daily liquidity management guide remains appropriate under severe constraints:
  - Lack of clarity about monetary policy objectives (e.g., multiple objectives or obligation to provide credit).
  - No formal separation between fiscal and monetary policy, impeding control over central bank balance sheet.
  - Political pressure to keep interest rates low and provide inexpensive central bank credit to government.
  - Very low financial intermediation where base money is mainly currency.

### Continued relevance of monetary aggregates and monetary analysis
- Monetary aggregates can contain useful information about current conditions, shocks, and forward-looking inflation signals.
- Status of money in policy strategy depends on financial market sophistication (footnote 10); weight on money indicators may decline as financial structures evolve.
- Monetary analysis is relevant for financial stability and can be complemented by flow of funds analysis (footnote 11).
- Factors supporting continued relevance:
  - Large and more persistent supply shocks making headline inflation volatile.
  - Large real and fiscal shocks to equilibrium interest rates relative to money demand shocks increase aggregates’ informational power.
  - Larger demand shocks relative to money demand shocks: under strict MT such shocks raise interest rates, potentially satisfying Taylor principle if money demand is interest-inelastic.
  - Significant information shortages on equilibrium interest rates, potential output, and volatile equilibrium interest rates hamper use of simple interest-rate rules and conventional DSGE models.
  - Uncertainties in forecasting tools and absence of explicit fiscal block raise risks for LICs with large fiscal shocks.
  - Weak macrofinancial building blocks may prevent central bank from “doing all that it takes” to hit an inflation target within a predefined horizon (footnote 12).

### Conceptual framework for transitioning: continuum and two transitional representations
- Continuum from MT to constrained-flexibility IT; intermediate two-pillar frameworks combine monetary and economic analysis.
- Two transitional representations where money retains a role but shifts from target to analytical focus:
  - Flexible Monetary Targeting (FMT)
    - Option 1: retain reserve money targets on average (not as short-term operational targets); no point policy rate; short-term market rates move within an interest-rate corridor periodically realigned.
    - Option 2: focus on broad money as intermediate target; no reserve money target; short-term interest rates are operational target.
  - Enhanced Monetary Policy Analysis (EMPA)
    - Inflation forecasting and economic analysis central as capacity improves.
    - Broad money downgraded from target to indicator; monetary analysis cross-checks economic analysis and monitors financial stability.

### Stylized features and operational details
- FMT Option 1 (flexible reserve money targeting with interest-rate-focused daily operations):
  - Set reserve money targets over a pre-specified period (e.g., quarterly), on average, possibly within a band.
  - Derive target path for total reserves consistent with reserve money target and forecasts for currency in circulation; total banks’ reserves guide short-term liquidity management.
  - Lengthen high-frequency liquidity forecasting horizon on a rolling basis and combine with lower-frequency forecasting to cover entire reserve money target horizon.
  - Manage day-to-day liquidity to keep total reserves broadly in line with target and offset autonomous flows to minimize short-term excess reserve volatility.
  - Allow short-term money market rates to drift within an interest-rate corridor formed by standing facilities; avoid a point policy rate.
  - Periodically reposition corridor if rates persistently near floor or ceiling; repositioning signals policy stance similar to changing a point policy rate.
  - Periodically reassess program assumptions and liquidity targets.
- FMT Option 2 (drop reserve money target; rely on broad money as intermediate target; allow point policy rate):
  - Broad money is primary intermediate target to inform stance; deviations do not mechanically change stance.
  - Fully accommodating day-to-day reserve demand may lead to broad money deviating from target; periodic reviews (e.g., quarterly) of BMP parameters quantify deviations and assess need for policy change.
  - If deviation judged excessive and assumptions hold, central bank should change policy stance by increasing (lowering) policy interest rate and adjust daily liquidity operations; revise monetary projections to converge broad money to target.
  - Example: review of monetary program takes place in April; forecasts cover a six-month period.
- EMPA:
  - Inflation forecasts central; central bank may not commit to keeping inflation close to a published numerical target within a preset horizon.
  - Auxiliary reference range for broad money anchors policy; EMPA acts as periodic review akin to BMP reviews.
  - Dual intermediate targeting: relative importance of money vs inflation forecast varies with confidence in each pillar.
  - Inflation forecast more prominent where inflation drivers are well understood; reference values for aggregates matter more when money demand is stable and predictable.

### Mapping options, conformity with practices, and building blocks
- Assessment of conformity with best practices is required before embarking on the "Journey to IT"; many countries are “in between.”
- Three building blocks for effective monetary policy:
  - Institutional set up: governance with price stability de jure primary objective; de facto & de jure central bank independence; accountability, transparency, and financial capacity of central bank.
  - Macro and financial development and stability: clear separation between monetary and fiscal policy; ability to articulate exchange rate role and intervention strategy; stable financial sector; supportive credit culture.
  - Data and analytical capacity: liquidity forecasting capacity; adequate statistical data; effective communication strategy; proven analytical capacities to assess transmission channels; clear decision-making process and supportive central bank organization.
- Building blocks development requires long-term commitment beyond the central bank; the central bank plays a catalytic role.
- Institutional and macrofinancial specifics:
  - EMPA adoption requires high conformity with institutional specifications; BMP or flexible RMP can safeguard against unclear primary objectives or limited autonomy.
  - Central bank should be adequately capitalized and able to rely on income stream to manage policy conduct costs.
  - As reliance on money targets declines, transparency and communication become more important to anchor expectations and protect independence.
  - For fiscal-dominant histories, main challenge is restricting government access to central bank credit; such countries need RMP and may adopt flexible monetary targeting if RMP implementation can be flexible.
  - Exchange rate should be an indicator or supplementary instrument but not a nominal anchor; rules-based FX interventions can enhance credibility while allowing unannounced interventions in extreme conditions.
  - A sound financial sector and functioning interbank market are critical for transmission; weak institutions can distort transmission via risk premia or altered credit standards.
  - Poor credit culture, weak payments infrastructure, lack of bankable projects, and weak accounting/auditing impede transmission from money market rates to deposit and lending rates.
- Data and analytical capacity building:
  - Strengthen liquidity forecasting, transmission channel identification, and analysis/research capacity concurrently.
  - During transition, consider a “range” for the policy rate rather than a discrete point to provide operational flexibility and absorb forecasting errors; narrow the range over time toward a point policy rate.
  - Distinguish economic analysis (recurrent policy work) from research-oriented economic modeling when building capacity.

### Capacity building and sequencing for forward-looking monetary policy
- Building analytical capacity is likely a multi-year effort. 21
- Recommended sequencing:
  - Initial phase: enhance financial programming (particularly where FMT remains relevant).
  - Move toward macroeconomic modeling as capacity and conditions permit.
  - Anchor capacity building in a medium-term program focusing on all aspects of policy formulation.
  - Sequence from the ground up; avoid early focus solely on state-of-the-art tools.
  - Ensure analytical tools align with existing policy framework to avoid forcing premature regime changes.
  - Prioritize monetary policy implementation progress (e.g., short-term liquidity management) before organizational or decision-process reforms.
- Risk: advancing institutional/organizational processes ahead of operational implementation can misalign processes with actual policy and divert scarce resources.

### Summary and conclusions (Section V)
- Purpose: assess desirability/applicability of IT in countries with evolving regimes; provide a conceptual framework and road map for the “Journey to IT.”
- Main practical implications:
  - Transitional arrangements combining monetary and economic analysis and operational arrangements emphasizing interest rates can benefit some countries.
  - Easing binding nature of monetary aggregates in short term allows stabilization of short-term money market rates, supporting market development and transmission strengthening.
  - Pragmatic modernization:
    - Buys time to establish technical building blocks (liquidity management, economic analysis).
    - Supports transparency via explicit reference to a monetary regime along the continuum from strict MT to IT.
    - Reduces undesirable outcomes: loss of an effective nominal anchor from premature IT switch, or undue delay of modernization from rigid reliance on monetary targets.
- Two stylized transitional (two-pillar) arrangements:
  - Flexible Monetary Targeting (FMT)
  - Enhanced Monetary Policy Analysis (EMPA)
- Policy stance: Journey to IT is a process; duration varies across countries.

### Two-pillar transitional arrangements — features and distinctions
- FMT:
  - Broad money retained as intermediate target.
  - Liquidity management stabilizes short-term interest rates via corridor arrangement.
  - Reviews against benchmark inform policy adjustments.
  - Excess reserves become operating target; reserve money target not pursued short term.
- EMPA:
  - Inflation forecast and enhanced analysis center stage.
  - Liquidity management ensures short-term rates align with policy rate.
  - Monetary pillar cross-checks economic pillar and monitors financial stability risks.
  - Monetary aggregates downgraded to reference/benchmark.

### Appendix II — Transmission channels (key points)
- Robust transmission mechanism to aggregate demand and inflation is critical.
- Empirical analysis requires research on relationships among base and broad money, interest rates, inflation, growth, money demand, the multiplier, and impulse response functions in a VAR setting.
- Factors affecting transmission: (i) banking sector competition; (ii) extent of access to alternative funding sources; (iii) depth of financial markets; (iv) extent of government involvement in financial markets; (v) level of financial intermediation; (vi) exchange rate regime; (vii) degree of current and capital account openness; (viii) importance of financial market developments in agents’ decisions.
- Main channels:
  - Interest rate channel: policy changes affect economy-wide interest rates, altering investment/savings and aggregate demand.
  - Exchange rate channel: policy changes alter exchange rate, affecting relative demand for domestic vs. foreign goods; absent under a peg.
  - Asset price channel: policy-induced asset price changes affect consumption and investment; strength depends on bond, equity, and real estate market development.
  - Availability of credit channel: policy affects quantity of available credit irrespective of interest rates; influenced by asymmetric information, enforcement costs, and banking system condition.
  - Inflation expectations channel: expectations influence price-setting and wage formation; expectations above target weaken confidence and may require faster policy rate increases.

### Appendix III — Role of money: conceptual debate and why money remains informative
- Endogenous vs. exogenous money debate:
  - Post-Keynesian / Horizontalists: perfectly elastic money supply; central bank accommodates money demand at exogenously set interest rate.
  - Monetarists / Verticalists: perfectly inelastic money supply; interest rate results from exogenous money supply set by central bank.
- Policy implication: if money supply not perfectly inelastic, central banks will at least partially accommodate changes in liquidity demand to stabilize market rates.
- Money remains informative because:
  - (i) monetary aggregates can proxy unobservable/lagged variables,
  - (ii) money has structural role in transmission,
  - (iii) money is a well-defined indicator that can serve as a nominal anchor.
- Recent drivers renewing monetary analysis interest:
  - Strengthened theoretical and empirical research on money's role in long-run inflation dynamics.
  - Central bank monopoly to issue liabilities and control short-end injections useful during GFC and zero lower bound environments.
  - Renewed focus on macroprudential tools and counterparts of monetary aggregates for financial stability assessment.

### Appendix IV — Guiding principles for formulation, analytical work, and research function
- Forward-looking orientation: absorb/adapt to shocks; recognize structural change can alter past relationships.
- Central analytical objectives:
  - (i) linkages between monetary, financial, price growth and economic performance;
  - (ii) factors affecting price dynamics;
  - (iii) interaction between nominal and real variables and transmission mechanisms.
- Form and sophistication of analytical work determined by economic/research unit maturity, statistical tools, staff profile, data quality (IMF, 2014a).
- Distinguish economic analysis (short-term recurrent policy work using econometric/ARIMA/VAR/VECM/macroeconometric/small DSGE models) from research-oriented modeling (theoretical/structural DSGE work).
- Rationale for maintaining research function:
  - Long-term analyses help anticipate events.
  - Internal research addresses practical, institution-specific implementation issues.
  - High-quality research enhances external visibility, credibility, and communication.

### Appendix V — Liquidity management in the transition
- Operational objective: stabilize short-term interest rates to anchor the yield curve, strengthen transmission, and avoid short-term interest rate volatility that muddles policy signal.
- Tools and configurations:
  - Improve short-term liquidity forecasting for OMOs.
  - Use standing lending and deposit facilities to form an interest-rate corridor.
  - Use reserve requirement averaging to flatten reserve demand.
- Interest-rate corridor systems:
  - All corridor systems combine overnight lending standing facility and deposit facility; OMOs influence market rates within corridor.
  - Introducing a formal policy rate requires ability/willingness to consistently steer interbank rate to the policy rate. 37
- Three corridor configurations:
  - Corridor with no official policy rate: suited where reserve money remains an operational target transitioning to interest-rate frameworks; persistent drifts should trigger corridor shift or reserve money path reassessment.
  - Floor system (deposit facility rate as target/policy rate): reduces need for OMO fine-tuning; attractive for weak liquidity forecasting capacity or structural surpluses; provides fewer incentives for interbank trading.
  - Mid-rate corridor (policy rate announced as target for interbank rate): requires OMOs to steer interbank rates near target; more demanding operationally; provides stronger interbank trading incentives.

*Source: _wp15136 - 4. Transmission Channels (PDF chapter).*

### References .............................................................................................................

### _wp15136 - References

### Tables
- 1. Central Bank Independence Scores .......................................................................................4
- 2. Monetary Regimes in Low and Middle Income Countries ....................................................6
- 3. Key Features of Conventional Monetary and Inflation Targeting Frameworks 
....................7
- 4. Stylized Transitional Frameworks: Key Features ................................................................16
- 5. Building Block for Effective Monetary Policy ....................................................................20
- 6. Mapping Options with Country Specifications....................................................................22

### Figures
- 1. Key Components of a Monetary Policy Framework .............................................................7
- 2. Stylized Transitional Frameworks .......................................................................................15
- 3.Monetary Program and Revisions – A Si
mple Illustration ...................................................18

*Source: _wp15136 - References*

### 4. Transmission Channels ...............................................................................................

### 4. Transmission Channels

### I. Introduction
- At present, most central banks are targeting inflation; "almost all central banks around the world are legally obliged to pursue price stability as one of their primary objectives."  
- Laurens and others (2009) survey: "95 percent" of 181 countries had price stability as one of the primary objectives of monetary policy; when central banks had multiple objectives, price stability typically was given priority.
- Central bank laws typically identify price stability as the means by which central bank policies contribute to economic growth; central bank independence has been strengthened as a means to attain this goal.
- Central Bank Independence Scores (higher numbers equals more independence, maximum of 1):
  - AFR: 0.33 (1980s) and 0.53 (2003)
  - APD: 0.30 (1980s) and 0.63 (2003)
  - EUR: 0.30 (1980s) and 0.88 (2003)
  - MCD: 0.30 (1980s) and 0.53 (2003)
  - WHD: 0.36 (1980s) and 0.67 (2003)
  - All: 0.32 (1980s) and 0.68 (2003)
- Countries with evolving monetary regimes aiming to move away from fixed exchange rate or monetary targeting regimes are modernizing along paths similar to advanced economies, often adopting inflation targeting (IT). However, those with weak policy transmission, less developed financial markets, implementation constraints, or weak macro/financial environments face significant challenges.
- The paper's objectives:
  - Provide a conceptual framework that accounts for key features of monetary policy regimes in evolving countries.
  - Offer principles for effective monetary policy given individual countries' initial conditions.
  - Map progress and ways to anchor monetary policy during the "Journey to IT."
- The paper builds on consensus elements of monetary policy reform: primacy of price stability, flexibility regarding money targets, forward-looking policy, development of in-house forecasting and policy analysis capacity, and central bank control over short-term interest rates for transmission.
- IMF program implications: propose enhancing criteria used to evaluate monetary policy performance in Fund-supported programs by introducing a Monetary Policy Consultation Clause instead of numerical targets on reserve money or net domestic assets as "performance criteria."

### II. Choice of a Framework for Countries with Evolving Monetary Regimes — General Considerations
- A well-specified framework requires:
  - A well-defined policy objective (typically inflation).
  - Clarity on intermediate and operational targets.
  - Specification of monetary policy instruments.
- Key conceptual elements (as used in the paper):
  - Policy objective: the final goal (typically the rate of inflation).
  - Intermediate target: a variable correlated with the objective that the central bank treats as a proxy (traditional examples: exchange rate, monetary aggregate; under IT: the inflation forecast).
  - Operational target: a variable the central bank can sufficiently control to guide day-to-day operations (examples: reserve money, commercial bank reserve balances, a short-term money market interest rate, or the exchange rate).
  - Instruments: tools fully controlled by the central bank to deliver the operational target (examples: open market operations (OMOs), standing facilities, reserve requirements).
  - Nominal anchor: a numerical objective on a nominal variable that constrains policy (examples: inflation measure, nominal exchange rate, growth rate of a monetary aggregate); roles are to promote price stability and limit time-inconsistency.
- Table contrasting Monetary Targeting (MT) and Inflation Targeting (IT) frameworks — key features preserved:
  - Monetary Targeting:
    - Main Instruments: OMOs, standing facilities, reserve requirement
    - Operational Target: Reserve money 1/
    - Intermediate Target: Broad monetary aggregate
    - Policy Objective: Inflation (implicit)
  - Inflation Targeting:
    - Main Instruments: OMOs, standing facilities, reserve requirement
    - Operational Target: Interest rates
    - Intermediate Target: Inflation forecast
    - Policy Objective: Inflation (explicit)
  - Footnote preserved: "1/ Until the 1980s, several central banks in advanced countries (in particular Germany and Canada) relied on short-term interest rates to achieve the intermediate target."
- The appropriate monetary regime depends on:
  - Political and economic institutions.
  - Main transmission channels of monetary policy.
  - Monetary authorities' technical capacity.
  - Macrofinancial conditions.
- Identifying the transmission mechanism is crucial (research on relationships among base money, broad money, interest rates, inflation, GDP growth, the multiplier, and impulse response functions).
- Financial market development matters:
  - Shallow financial markets, low intermediation, and high inflation historically favored monetary targeting.
  - Deep financial markets with strong interest rate transmission favor interest-rate based operating procedures and IT.
- Comparisons of MT and IT:
  - MT: clearer timing and triggers for intervention due to control over reserve money.
  - IT: timing less obvious because of variable lags; requires stronger communication, transparency, and accountability to build credibility and influence expectations.

### II. Choice of a Framework for Countries with Evolving Monetary Regimes — Evolving Monetary Regimes (analysis and policy implications)
- Key analytical points:
  - Neither MT nor IT may be immediately suitable for countries with evolving monetary regimes.
  - MT can be an effective disciplining tool during early disinflation in countries with flexible exchange rates; however, as inflation falls, the stability of relationships (money multiplier, velocity) that underpin MT weakens.
  - Some countries without pegs cannot credibly commit to a numerical inflation target within a fixed policy horizon, as required by IT.
  - Given evolving economic and financial infrastructures, moving to a framework where an inflation objective plays a central role—with emphasis on analysis rather than rigid money rules—is reasonable.
- Policy trade-offs and recommended approach:
  - Strengthen key channels of monetary policy transmission (interest rate channel and expectations channel) while maintaining an effective nominal anchor for inflation expectations.
  - For countries with Fund-supported programs, monetary conditionality frameworks resembling MT may be needed to safeguard resources, but they can limit monetary policy modernization and transmission strengthening.
  - Responding to exogenous shocks requires flexibility that may conflict with rigid preset monetary targets.
  - Preferable to:
    - Formulate and monitor monetary policy using multiple indicators.
    - Introduce forward-looking analytical tools.
    - Reduce reliance on rigid policy rules.
    - Increase the weight given to discretion and judgment in conduct of policy.
- Transition dynamics:
  - The "Journey to IT" is likely to be long due to structural transformation, capacity building, data requirements, and time needed to strengthen transmission.
  - A transitional regime can allow central banks and market participants to build confidence in analytical and operational tools.
  - Gradualism may be warranted; however, transition to IT can commence before all pre-conditions are met provided there is a clear commitment to full implementation (IMF, 2014b).
- Decisions for countries modernizing monetary policy:
  - Role of monetary aggregates can vary by country: from quantitative targets to indicators supplementing short-term risk assessments to price stability.
  - Monetary analysis (including credit counterparts) should be used to cross-check other information rather than necessarily to set precise numerical targets for reserve money or other aggregates.

*Source: _wp15136 - 4. Transmission Channels (PDF chapter).*

### conclusions from the economic analysis. In fact, the global financial crisis (GFC) has

### _wp15136 - conclusions from the economic analysis. In fact, the global financial crisis (GFC) has

### Key operational principles for evolving monetary regimes
- Money and credit information should not be excluded a priori from monetary policy analysis or financial stability analysis (Trichet, 2013).
- Exchange rate
  - Some degree of exchange rate subordination (“flexibility”) is necessary to allow monetary policy an independent role.
  - Central bank should allow short and medium-term fluctuations in the nominal exchange rate and increase understanding of exchange rate pass-through to communicate the role the exchange rate will play in monetary policy.
  - A clear articulation of an intervention strategy in the foreign exchange market is critical.
- Interest rates
  - In operational terms, monetary policy is about setting the appropriate level of interest rates in the economy; this remains true during the transition.
  - Central banks should avoid adhering to a rigid reserve money rule in transition to prevent volatile or overshooting interest rates that can harm the real economy.
- Communication
  - Central bank communication is essential to anchor inflation expectations in an evolving monetary regime.
  - Communication should cover key macroeconomic variables and monetary policy implementation, aligned with how policy is actually implemented and focused on what matters for private sector behavior (i.e., interest rates and future inflation).
  - May require actions to raise financial literacy of the population in general.

### Transitional challenges for countries with evolving monetary regimes
- Three main challenges:
  - Insulate the central bank from fiscal pressures to protect institutional and operational independence, especially where government securities markets are undeveloped.
  - Develop operating procedures for liquidity management that minimize unnecessary short-run volatility in shallow money markets.
  - Find information variables and analytical tools to guide near-term monetary policy amid significant data gaps.

### When is Reserve Money Targeting Useful?
- Reserve money program (RMP) as guide for daily liquidity management remains appropriate under severe constraints:
  - Lack of clarity about monetary policy objectives (e.g., multiple objectives or obligation to provide credit to the economy).
  - No formal separation between fiscal and monetary policy, impeding control over the central bank balance sheet.
  - Political pressure to keep interest rates low and provide inexpensive central bank credit to government.
  - Very low level of financial intermediation where base money is mainly currency, leaving little scope for monetary policy.

### Continued relevance of monetary aggregates and monetary analysis
- Monetary analysis remains relevant:
  - Monetary aggregates can contain useful information about current conditions, shocks, and forward-looking information about future inflation.
  - Status of money in policy strategy depends on degree of financial markets sophistication (footnote 10); weight on money supply indicators may decline as financial structures evolve.
  - Monetary analysis is relevant for financial stability and can be complemented by flow of funds analysis (footnote 11).
- Factors supporting continued relevance in evolving regimes:
  - Large and more persistent supply shocks: headline inflation more volatile; output and inflation shocks tend to be negatively correlated and of longer duration, complicating use of traditional models and making formal short-horizon inflation targets potentially premature.
  - Large real and fiscal shocks to equilibrium interest rates relative to money demand shocks: may increase informational power of monetary aggregates versus interest rates for predicting inflation over the medium term.
  - Larger demand shocks, including fiscal shocks, relative to money demand shocks: under strict monetary targeting such shocks raise interest rates which could satisfy the Taylor principle if money demand is relatively interest rate inelastic.
  - More significant information shortages: paucity of real-time info about equilibrium interest rates, actual and potential output, and volatile equilibrium interest rates hampering use of simple interest rate rules and conventional DSGE models.
  - Uncertainties regarding adequacy of forecasting tools: models used by advanced countries may not capture complexity of evolving regimes; absence of an explicit fiscal block poses risk for LICs with large uncoordinated fiscal shocks.
  - Weak macrofinancial building blocks: even with robust inflation forecasts, weaknesses in macro-financial building blocks may prevent the central bank from “doing all that it takes” to hit an inflation target within a predefined horizon (footnote 12).

### Conceptual framework for transitioning
- Continuum of frameworks from monetary targets (MT) to constrained flexibility under inflation targeting (IT); intermediate frameworks combine monetary and economic analysis (two-pillar frameworks).
- Two broad transitional representations where money retains a role but shifts from target to analytical focus:
  - Flexible Monetary Targeting (FMT)
    - Option 1: retain reserve money targets but not as short-term operational targets; targets on total reserves constrain on average the volume of monetary operations; no point policy rate; short-term market rates move within an interest rate corridor periodically realigned.
    - Option 2: focus solely on broad money as intermediate target; no reserve money target; short-term interest rates are the operational target.
  - Enhanced Monetary Policy Analysis (EMPA)
    - As inflation forecasting and economic analysis capacity improves, inflation forecasting becomes central.
    - Broad money downgraded from target to indicator; monetary analysis cross-checks economic analysis and monitors financial stability risks.

### Stylized features and operational details
- FMT Option 1 (flexible reserve money targeting combined with interest-rate-focused daily operations):
  - Set reserve money targets over a pre-specified period (e.g., quarterly), on average terms, possibly within a band.
  - Derive target path for total reserves consistent with longer-term reserve money target and forecasts for currency in circulation; total banks’ reserves guide short-term liquidity management.
  - Lengthen high-frequency liquidity forecasting horizon on a rolling basis and combine with lower frequency forecasting to cover entire reserve money target horizon.
  - Manage day-to-day liquidity to keep total reserves on average broadly in line with target path and offset autonomous flows to minimize short-term excess reserve volatility.
  - Allow short-term money market rates to drift within an interest rate corridor formed by standing lending and deposit facilities; avoid introducing a point policy rate.
  - Periodically reposition corridor if rates persistently near floor or ceiling; repositioning signals policy stance similar to changing a point policy rate.
  - Periodically reassess program assumptions and liquidity targets.
- FMT Option 2 (drop reserve money target; rely on broad money as intermediate target; allow point policy rate):
  - Broad money is primary intermediate target to inform policy stance; deviations from broad money target do not mechanically change stance.
  - Fully accommodating day-to-day reserve demand may lead to broad money deviating from target; periodic reviews (e.g., quarterly) of BMP parameters should quantify deviations and assess need for policy change.
  - If deviation is judged excessive and assumptions hold, central bank should change policy stance by increasing (lowering) the policy interest rate and adjust daily liquidity operations; revise monetary projections and estimate path for broad money to converge gradually to target.
  - Example: review of monetary program takes place in April; forecasts cover a six-month period (Figure 3 illustration).
- EMPA
  - Inflation forecasts move to center of strategy; central bank may not commit to keeping inflation close to a published numerical target within a preset horizon.
  - Auxiliary reference range for broad money anchors policy; EMPA acts as periodic review akin to BMP reviews.
  - Dual intermediate targeting regime: importance of money vs inflation forecast varies over time with confidence in each pillar.
  - Inflation forecast more prominent where drivers of inflation are well understood or inflation trends are persistent; reference values for monetary aggregates matter more when money demand is stable and predictable.

### Mapping options, conformity with practices, and building blocks
- Countries must assess conformity with best practices before embarking on “the Journey to IT”; continuum of initial conditions implies many countries are “in between.”
- Three building blocks for effective monetary policy:
  - Institutional set up: governance framework with price stability as de jure primary objective; de facto & de jure CB independence; adequate accountability, transparency, and financial capacity of CB.
  - Macro and financial development and stability: clear separation between monetary and fiscal policy; ability to articulate exchange rate role and intervention strategy; stable financial sector; supportive credit culture.
  - Data and analytical capacity: liquidity forecasting capacity; adequate statistical data; effective communication strategy; proven analytical capacities to assess transmission channels; clear decision-making process and supportive CB organization.
- Developing building blocks requires long-term commitment from authorities beyond the central bank; CB plays catalytic role but many issues lie outside its direct control.
- Institutional and macrofinancial specifics:
  - Adoption of EMPA requires high conformity with institutional specifications; reliance on BMP or flexible RMP can safeguard against lack of clear primary objective or limited autonomy.
  - Central bank should be adequately capitalized and able to rely on income stream to manage costs of conducting policy.
  - As reliance on money targets declines, transparency and communication become more important to anchor expectations and protect independence.
  - For fiscal dominance histories, main challenge is to restrict government access to direct or indirect central bank credit; such countries will need RMP and may adopt flexible monetary targeting if RMP implementation can be made flexible.
  - Exchange rate should be an indicator or supplementary instrument but not a nominal anchor; rules-based FX interventions can enhance credibility while allowing unannounced interventions in extreme conditions.
  - A reasonably sound financial sector and functioning interbank market are critical for policy transmission; weak institutions can distort transmission via risk premia or altered credit standards.
  - Poor credit culture, weak payments infrastructure, lack of bankable projects, and weak accounting/auditing impede transmission from money market rates to deposit and lending rates.
- Data and analytical capacity building:
  - Central bank must strengthen liquidity forecasting, transmission channel identification, and analysis/research capacity concurrently.
  - During transition, consider a “range” for the policy rate rather than a discrete point rate to provide operational flexibility and absorb forecasting errors; the range can be narrowed over time leading to a point policy rate.
  - Distinguish economic analysis from research-oriented economic modeling when building analytical capacity.

*Italic: Source — _wp15136 - conclusions from the economic analysis. In fact, the global financial crisis (GFC) has*

### Appendix IV). Such a distinction allows to separate the recurrent analysis that is necessary to

### _wp15136 - Appendix IV). Such a distinction allows to separate the recurrent analysis that is necessary to

### Capacity building and sequencing for forward-looking monetary policy
- Building analytical capacity to support a forward-looking approach to monetary policy is likely to be a multi-year effort. 21
- Recommended sequencing:
  - Initial phase could involve enhancing financial programming (in particular where an FMT framework may remain relevant).
  - Move towards macroeconomic modeling as capacity and conditions permit.
  - Anchor capacity building in a properly thought out medium-term program focusing on all aspects of the policy formulation process.
  - Sequence efforts from the ground up; avoid early focus solely on state-of-the-art tools.
  - Ensure analytical tools developed are aligned with the existing policy framework to avoid forcing authorities to change regimes prematurely.
  - Prioritize progress in monetary policy implementation (e.g., short-term liquidity management framework) before organizational or decision-process reforms.
- Risk: Advancing institutional/organizational processes ahead of operational implementation can produce processes misaligned with actual monetary policy implementation and divert scarce resources.

### Summary and conclusions (Section V)
- Purpose: Contribute to debate on desirability and applicability of inflation targeting (IT) in countries with evolving monetary regimes; provide a conceptual framework and road map for the “Journey to IT” based on assessment of economic/financial environment and central bank capacity.
- Main arguments and practical implications:
  - Transitional arrangements that combine monetary and economic analysis tools and operational arrangements emphasizing interest rates can benefit some countries during the Journey to IT.
  - Easing the binding nature of monetary aggregates in the short term allows the central bank to stabilize short-term money market interest rates, supporting market development and strengthening monetary policy transmission.
  - Constraints faced by countries with evolving monetary regimes favor a pragmatic modernization approach because it:
    - Allows the central bank to buy time for establishing technical building blocks (including effective liquidity management and economic analysis capacity).
    - Supports transparency in central bank communication through explicit reference to a monetary regime along the continuum from strict monetary targeting to IT; positioning depends on progress in building blocks.
    - Reduces potential undesirable outcomes: loss of an effective nominal anchor from premature switch to IT, or undue delay of modernization from rigid reliance on monetary targets.
- Two stylized transitional (two-pillar) arrangements presented:
  - Flexible Monetary Targeting (FMT)
  - Enhanced Monetary Policy Analysis (EMPA)
- Policy stance: The Journey to IT should be viewed as a process; duration varies across countries.

### Two-pillar transitional arrangements — features and distinctions
- Flexible Monetary Targeting (FMT)
  - Broad money retained as the intermediate target.
  - Liquidity management aims to stabilize short-term interest rates, supported by a corridor arrangement.
  - Reviews of performance vis-à-vis the benchmark inform adjustments to monetary policy stance.
  - Excess reserves becomes the operating target; reserve money target is not pursued in the short term.
- Enhanced Monetary Policy Analysis (EMPA)
  - Inflation forecast and enhanced monetary policy analysis take center stage.
  - Liquidity management aims to ensure short-term interest rates are well aligned with the central bank’s policy rate.
  - Monetary pillar evolves toward cross-checking the economic pillar and serves as a reference/benchmark and for monitoring risks to financial stability.
  - Monetary aggregates’ status is downgraded to a reference value/benchmark.

### Specifications and practices for the building blocks of effective monetary policy
- Focus on defining a road map for enhancing compliance with building blocks across authorities (not only the central bank) to limit undesirable outcomes.
- Emphasis on aligning analytical tools and institutional arrangements with stages of operational implementation.

### Appendix I — Key concepts (definitions preserved)
- Broad monetary program (BMP): quarterly, semiannual, or annual framework where broad macroeconomic objectives are set in terms of fiscal, monetary and balance of payments; projections of monetary aggregates based on a money demand equation consistent with an underlying inflation objective.
- Evolving monetary regimes: combine elements of MT and IT, more focus on analysis than a pre-set money rule; migrate to proactive and forward-looking monetary policy with flexibility on money targets and subordinating exchange rate to monetary objectives.
- Flexible Inflation Targeting: IT central banks aim at keeping inflation near the target rate over the medium run; take into account output, interest rate, exchange rate volatility, and financial stability in setting the pace of adjustment (Woodford, 2013).
- Forward-looking monetary policy: uses new observations in the economic forecast for decision making; relies on statistical and forecasting tools to incorporate expectation changes; broader than the IT-specific forward-looking concept in academic literature (Woodford, 2000).
- Inflation targeting (IT): a published numerical inflation target within a predefined policy horizon prevails and becomes the nominal anchor; policies set so the inflation forecast credibly returns to the target absent further shocks; market-based, transparent, and accountable conduct.
- Inflation targeting lite (ITL): countries float exchange rate and announce an inflation target but do not maintain it as the foremost policy objective; viewed as a transitional regime (Stone, 2003).
- Monetary targeting (MT): based on the financial programming framework with a money demand function, BMP and RMP; monetary target derived from assumptions on income velocity and real GDP growth and a target inflation path; reserve money target provides an operational guide for liquidity management.
- Nominal anchor: numerical objective on a nominal variable to constrain monetary policy and tie down the price level; can be a measure of inflation, the nominal exchange rate (hard peg), or growth rate of a monetary aggregate.
- Reserve money program (RMP): derived from BMP, based on statistical relationship between broad money and reserve money (money multiplier); provides operational targets to calibrate monetary operations and short-term liquidity management.
- Two-Pillar Framework: combines MT and IT elements with monetary and economic pillars; operation distinguished by the relative weight given to each pillar.
  - Under FMT: monetary pillar dominant; broad money intermediate target; liquidity management uses excess reserves and corridor to manage interest rate volatility.
  - Under EMPA: inflation forecast and enhanced analysis center stage; monetary pillar cross-checks and liquidity management tightly steers short-term interbank rates around policy rate.

### Appendix II — Transmission channels of monetary policy (key points)
- Robust transmission mechanism from policy actions to aggregate demand and inflation is critical.
- Analysis requires research on relationships among base and broad money, interest rates, inflation, growth, money demand, the multiplier, and impulse response functions in a VAR setting.
- Factors affecting nature, speed, and intensity of transmission:
  - (i) banking sector competition
  - (ii) extent of access to alternative funding sources
  - (iii) depth of financial markets
  - (iv) extent of government involvement in financial markets
  - (v) level of financial intermediation
  - (vi) exchange rate regime
  - (vii) degree of current and capital account openness
  - (viii) importance of financial markets developments in economic agents’ decisions
- Monetary policy mainly works through interest rates and the exchange rate. 23
- Narrow transmission channels identified:
  - Interest rate channel: changes in policy affect economy-wide interest rates, altering investment/savings and aggregate demand; predictability depends on banking competition, access to alternative funding, and market depth.
  - Exchange rate channel: changes in policy alter exchange rate, affecting relative demand for domestic vs. foreign goods; absent under a peg; works better with high exchange rate variability and asset substitutability.
  - Asset price channel: policy-induced asset price changes (equity, collateral) affect consumption and investment; strength depends on development of bond, equity, and real estate markets.
  - Availability of credit channel: policy affects quantity of available credit irrespective of interest rates; influenced by asymmetric information, enforcement costs, and banking system financial condition.
  - Inflation expectations channel: expectations influence firms’ price-setting and wage formation; expectations above target weaken confidence and may require faster policy rate increases.

*Source: excerpt from the provided Appendix and Appendices I–II content.*

### APPENDIX III. ROLE OF MONEY IN MONETARY POLICY: THE CONCEPTUAL DEBATE

### APPENDIX III. ROLE OF MONEY IN MONETARY POLICY: THE CONCEPTUAL DEBATE

### Conceptual debate: Endogenous vs. exogenous money
- Two contrasting views:
  - Post-Keynesian / Horizontalists: assume a perfectly elastic money supply function; central bank accommodates money demand at the exogenously set interest rate. (Moore (1988) terminology) 24
  - Monetarists / Verticalists (including Neoclassical Synthesis Keynesians and New Keynesians to a large extent): assume a perfectly inelastic money supply function; interest rate results from the exogenous money supply determined by the central bank. 24
- Policy implication:
  - If money supply is not perfectly inelastic, central banks tend to accommodate at least partially (possibly short-term) changes in agents’ demand for liquidity to stabilize market interest rates.

### Historical experiences and policy evolution
- Historical examples of accommodative policies leading to high and volatile inflation:
  - Reichsbank market intervention to stabilize the exchange rate in early 1923 (induced by adverse fiscal news).
  - Federal Reserve accommodation between the onset of World War II and the 1951 Treasury-Federal Reserve Accord.
- Observed structural change:
  - Innovations in financial structure, products/instruments, and regulation altered the relationship between the average annual rate growth of the money stock and the average annual rate of increase of prices (Rudebusch (1998), Hauser and Brigden (2002)). 25
- Timeline of policy stance shifts:
  - Growing academic criticisms in the 1970s about political control over central banks and high inflation.
  - Questioning of strict monetarist targeting in the 1980s due to instability in the relationship between monetary aggregates and economic growth.
  - The Federal Reserve initiated changes in monetary targeting, later followed by other central banks.
  - Even where money is no longer an explicit target, monetary analysis remains a key input to assessing the monetary policy stance. 26

### Why money remains informative for policy
- Three intrinsic features of money that sustain its relevance (Masuch et al. (2003)):
  - (i) Monetary aggregates can be useful proxies for variables not easily observable or only observable with time lags.
  - (ii) Money has an important structural role in the transmission of monetary policy. 27
  - (iii) Money is a well-defined indicator which may serve as a nominal anchor for the economy.
- Paradox noted in literature: “we are all monetarists now...” (Uhlig (2008) and Woodford (2008)) — money has moved from an explicit policy target to a prime indicator for forecasting inflation.

### Recent drivers renewing interest in monetary analysis
- Strengthened theoretical and empirical research confirming money’s role in long-run inflation dynamics. 28
- Central bank monopoly to issue liabilities and ability to control money initially injected in markets at the very short end; useful in GFC and in zero lower bound environments. 30
- Renewed focus on macroprudential tools and scrutiny of counterparts of monetary aggregates as inputs to financial stability assessment (Borio (2011); Mersch (2013)).
- Consensus: central banks monitor monetary developments closely but approaches to monetary analysis differ; key question is how to extract and process the pertinent information from monetary and financial data.

*Source: APPENDIX III from the supplied IMF PDF content.*

---

### APPENDIX IV. GUIDING PRINCIPLES FOR MONETARY POLICY FORMULATION

### Forward-looking analytical orientation
- Monetary policy must absorb and adapt to shocks from macro and/or microeconomic imbalances while recognizing that structural changes can alter past relationships.
- Central analytical objectives:
  - (i) Linkages between monetary, financial, price growth and economic performance to calibrate the macroeconomic framework.
  - (ii) Factors affecting price dynamics.
  - (iii) Interaction between nominal and real variables and monetary policy transmission mechanisms.
- Practical requirements:
  - Continuous efforts to overcome statistical and methodological obstacles and human resource constraints. 31

### Form and sophistication of central bank analytical work
- Determinants: maturity of economic and research units, quality of statistical tools, staff profile, data quality and coverage (IMF, 2014a).
- Orientation: applied/empirical work to inform policy decisions; theoretical academic research remains a useful input but may not cover all practical policy implementation issues. 32 35
- Transitional note: in less developed financial markets and with limited central bank analytical capacity, start with short-term economic analysis (FMT) before moving to comprehensive frameworks (EMPA). 33

### Distinction between economic analysis and research-oriented modeling
- Economic analysis:
  - Short-term, recurrent analysis for policy conduct and assessment.
  - Covers financial, monetary, economic indicators and forecasting for stance determination.
  - Uses a suite of models: econometric (ARIMA, VAR, VECM...), macroeconometric models, and small scale DSGE models.
- Research-oriented economic modeling:
  - Theoretical or empirical work to understand causes of changes or test new equilibria, typically in a general equilibrium framework (DSGE).
  - Aim: estimate structural economic relationships and simulate policy reactions to enrich policy debate rather than replace short-term forecasts. 34
- Expert judgment:
  - Forecasters' and policymakers’ judgments are essential because models are simplified and incomplete representations.

### Rationale for maintaining a research function
- Three main factors:
  - First: long-term fundamental analyses help the central bank anticipate events and avoid being behind the curve.
  - Second: central banks cannot rely solely on academic research; internal research addresses practical, institution-specific implementation issues. 35
  - Third: high-quality research enhances external visibility and credibility, supporting institutional reputation and communication.

*Source: APPENDIX IV from the supplied IMF PDF content.*

---

### APPENDIX V. LIQUIDITY MANAGEMENT IN THE TRANSITION

### Operational objective
- Short-term liquidity management must stabilize short-term interest rates to anchor the yield curve, strengthen transmission along the yield curve to other rates, and enhance monetary policy transmission.
- Risk of focusing short-term liquidity management on reserve money (instead of banks’ reserve balances and short-term interest rates): unwarranted short-term interest rate volatility that muddles policy signal and hampers transmission.

### Tools and configurations to stabilize short-term interest rates
- Operational tools:
  - Improve short-term liquidity forecasting to fine-tune open market operations (OMOs).
  - Use standing lending and deposit facilities to form an interest-rate corridor for the interbank rate.
  - Use reserve requirement averaging provisions to flatten demand for reserves.
- System evolution: the liquidity management configuration should evolve with country circumstances; there is no one “best configuration.”

### Interest-rate corridor systems and policy-rate introduction
- All corridor systems: overnight lending standing facility combined with deposit standing facility to provide a corridor; OMOs can influence market rates within the corridor.
- Suitability of introducing a formal policy rate depends on the central bank’s ability and willingness to consistently steer the interbank rate to the policy rate. 37

### Three corridor configurations
- Corridor with no official policy rate:
  - Suited for countries relying heavily on reserve money as a near- to medium-term operational target (conventional monetary targeting) transitioning toward interest-rate frameworks.
  - Lack of a policy rate may make it harder to stabilize interbank rates, but provides flexibility to keep day-to-day operations consistent with reserve money targets.
  - Persistent drifts should trigger a shift of the corridor or reassessment of reserve money paths under flexible targeting.
- Floor system (standing deposit facility rate as target and policy rate):
  - Reduces need for fine-tuning OMOs; attractive for countries with weak liquidity forecasting capacity and/or structural liquidity surpluses.
  - Provides fewer incentives for banks to engage in interbank trading.
- Mid-rate corridor system (policy rate announced as target for interbank rate):
  - Requires commitment to use OMOs to steer interbank rates close to the target.
  - More demanding: better liquidity forecasting, more frequent OMOs, and supporting measures (e.g., reserve averaging).
  - Provides stronger incentives for interbank trading.

*Source: APPENDIX V from the supplied IMF PDF content.*

### REFERENCES

### _wp15136 - REFERENCES

### Monetary policy frameworks and inflation targeting
- Blanchard, O., 2005, “Fiscal Dominance and Inflation Targeting: Lessons from Brazil,” in F. Giavezzi, I. Godfajn, S. Herrera (eds.), Inflation Targeting, Debt, and the Brazilian Experience, 1999-2003 (Cambridge: MIT Press).
- Freedman, C. and I. Ötker-Robe, 2009, “Country Experiences with the Introduction and Implementation of Inflation Targeting,” International Monetary Fund, Working Paper No. 09/161, Washington D.C.
- Freedman, C. and I. Ötker-Robe, 2010, “Important Elements for Inflation Targeting for Emerging Economies,” International Monetary Fund, Working Paper No. 10/113, Washington D.C.
- Masson, P, M. Savastano, and S. Sharma, 1997, “The Scope for Inflation Targeting in Developing Countries,” IMF Working Paper 97/130 (Washington, International Monetary Fund).
- Mishkin, F. S. and A. S. Posen, 1997, “Inflation Targeting: Lessons from Four Countries,” Federal Reserve Bank of New York Economic Policy Review, August 1997: 9-110.
- Schaechter A, M. Stone, and M. Zelmer, 2000, “Adopting Inflation Targeting: Practical Issues for Emerging Market Countries,” IMF Occasional Paper No 202, (Washington, International Monetary Fund).
- Svensson, L.E.O., 1997, “Inflation forecast targeting: Implementing and monitoring inflation targets,” European Economic Review 41, 1111–46.
- Stone, M., 2003, “Inflation Targeting Lite,” IMF Working Paper 03/12 (Washington: International Monetary Fund).
- Reichlin, L. and R. Baldwin (eds.), 2013, Is Inflation Targeting Dead? Central Banking After the Crisis (London: Center for Economic Policy Research).
- Woodford, M., 2013, “Inflation targeting: Fix it, don’t scrap it,” in Reichlin, L. and R. Baldwin (eds.), Is Inflation Targeting Dead? Central Banking after the Crisis (London: Center for Economic Policy Research).

### Central bank operations, balance sheets, and institutional issues
- Archer, D. and P. Moser-Boehm, 2013, “Central Bank Finances,” Bank for International Settlements Paper No 71, April 2013.
- Bank of England, 2010, “Monetary Policy Roundtable,” Quarterly Bulletin, Q3, 219-22.
- Bank of England, 2012, “State of the Art of Inflation Targeting,” Centre for Central Bank Studies Handbook No. 29.
- Bindseil, U., 2014, “Monetary Policy Operations and the Financial System,” Oxford University Press.
- Bindseil, U., 2004, “The Operational Target of Monetary Policy and the Rise and Fall of Reserve Position Doctrine,” ECB Working Paper No. 372.
- Durré, A. and H. Pill, 2012, “Central bank balance sheets as policy tools,” BIS papers, No. 66, 193-213.
- Durré, A. and F. Smets, 2014, “Sovereign debt crisis and monetary policy in theory and practice: the case of the euro area,” forthcoming in J. Chadha, A. Durré, M. Joyce and L. Sarno, New Developments in Macro-Finance Yield Curve Modeling, Cambridge University Press.
- European Central Bank, 2011, The Monetary Policy of the ECB (Frankfurt, European Central Bank).
- Trichet, J-C., 2013, “Central Banking in the Crisis: Conceptual Convergence and Open Questions on Unconventional Monetary Policy,” 2013 Per Jacbosson Lecture given in the context of the 2013 Annual Meetings of the IFM and World Bank.
- Tucker, P., 2004, “Managing the Central Bank’s Balance Sheet: Where Monetary Policy Meets Financial Stability,” Lecture delivered to mark the Fifteenth Anniversary of Lombard Street Research.
- Gray, S., 2011, “Central Bank Balances and Reserve Requirements,” International Monetary Fund, Working Paper No. 11/36, Washington D.C.

### Role of money, monetary aggregates, and monetary analysis
- Benati, L., and C. Goodhart, 2011, “Monetary Policy Regimes and Economic Performance: The Historical Record, 1979-2008” in Handbook of Monetary Economics, Vol. 3B, ed. by Benjamin M. Friedman and Michael Woodford (Amsterdam: Elsevier; North-Holland).
- Beyer, A. and L. Reichlin (eds.), 2008, The Role of money – Money and monetary policy in the twenty-first century, Frankfurt-am-Main: European Central Bank.
- Brunner, K., 1989, “The Role of Money and Monetary Policy,” Federal Reserve Bank of Saint Louis Review, September/October, 4-22.
- Fischer, B., M. Lenza, L. Reichlin, and H. Pill, 2008, “Money and monetary policy: the ECB experience 1999-2006”, in Beyer, A and L. Reichlin (eds.), The Role of money – Money and monetary policy in the twenty-first century, 102-75.
- Grant, K., G. Vlieghe, and A. Brigden, 2004, “Assessing the stability of narrow money demand in the United Kingdom,” Bank of England Quarterly Bulletin, Summer, 131-41.
- Hancock, M., 2003, “Divisia money,” Bank of England Quarterly Bulletin, Spring, 39-46.
- Hauser, A. and A. Brigden, 2002, “Money and credit in an inflation-targeting regime”, Bank of England Quarterly Bulletin, Spring, 299-307.
- Masuch, K., S. Nicoletti-Altimari, and M. Rostagno, 2003, “The role of money in monetary policymaking,” BIS Papers, No. 19, pp-158-91.
- Poole, W., 2000, “Monetary aggregates and monetary policy in the twenty-first century”, in R.W. Kopcke and L.E. Browne (eds.), The evolution of monetary policy and the federal system over the past thirty years: a conference in honor of Frank E. Morris, Federal Reserve Bank of Boston, Conference Series, 45, 12-24.
- Friedman, B. M., 2000, “The Role of Interest Rates in Federal Reserve Policy Making,” in R.W. Kopcke and L.E. Browne (eds.), The evolution of monetary policy and the federal system over the past thirty years: a conference in honor of Frank E. Morris, Federal Reserve Bank of Boston, Conference Series, 45,3 pp.43-65.
- Freedman, C., 2000, “Monetary aggregates and monetary policy in the twenty-first century: Discussion,” in R.W. Kopcke and L.E. Browne (eds.), The evolution of monetary policy and the federal system over the past thirty years: a conference in honor of Frank E. Morris, Federal Reserve Bank of Boston, Conference Series, 45,3 pp.1-41.
- Woodford, M., 2008, “Does a two-pillar Phillips curve justify a two-pillar monetary strategy”, in Beyer A., and L. Reichlin (eds), The Role of money – Money and monetary policy in the twenty-first century, 56-82.
- Woodford, M., 2000, “Pitfalls of forward-looking monetary policy”, American Economic Review, Vol. 90(2), papers and proceedings of the one hundred twentieth annual meeting of the American Economic Association, May, 100-04.

### Models, forecasting, and analytical tools
- Berg, A., P. Karam, and D. Laxton, 2006, “Practical Model-Based Monetary Policy Analysis: A How-To Guide,” IMF Working Paper 06/81 (Washington, International Monetary Fund).
- Brayton, F., A. Levin, R. Tryon, and J.C. Williams, 1997, “The Evolution of Macro Models at the Federal Reserve Board,” Federal Reserve Board of Governors Working Paper, No. 1997-29.
- Laxton, R., and R. Scott, 2009, “Developing a Structured Forecasting and Policy Analysis System to Support Inflation-Forecast Targeting (IFT),” IMF Working Paper 09/65 (Washington, International Monetary Fund).
- McCallum, B.T., 1981, “Price Level Determinacy with an Interest Rate Policy Rule and Rational Expectations,” Journal of Monetary Economics, 8 (1981), pp. 319–29.
- Uhlig, H., 2008, “Comment on Woodford, M. (2008)” in Beyer, A and Reichlin, L. (eds), The Role of money – Money and monetary policy in the twenty-first century, 87-96.
- Selody, J., 2000, “Uncertainty and multiple perspectives,” in Klöckers, H-J and Willeke, C (eds.). Monetary analysis: tools and applications, 31-46.
- Pill, H., 2001, “Monetary analysis: tools and applications”, in Klöckers, H-J and Willeke, C (eds.) Monetary analysis: tools and applications, 11-30.
- Klöckers, H-J and C. Willeke (eds.), 2001, Monetary analysis: tools and applications, Frankfurt: European Central Bank.

### Fiscal-monetary interactions and policy coordination
- Laurens, B., and E. de la Piedra, 1998, “Coordination of Monetary and Fiscal Policies,” IMF Working Paper 98/25 (Washington, International Monetary Fund).
- Laurens, B., 2005, “Monetary Policy Implementation at Different Stages of Market Developmen,” IMF Occasional Paper No 244, (Washington, International Monetary Fund).
- Laurens, B., M. Arnone, and J-F. Segalatto, 2009, Central Bank Independence, Accountability, and Transparency: A Global Perspective (Washington, International Monetary Fund, Palgrave Macmillan).
- Leeper, E.M., 1991, “Equilibria under ‘Active’ and ‘Passive’ monetary and fiscal policies,” Journal of Monetary Economics, Vol. 27(1), 129-47.
- Ostry, J, Atish R. Ghosh, and M. Chamon, 2012, “Two Targets, Two Instruments: Monetary and Exchange Rate Policies in Emerging Market Economies,” IMF Staff Discussion Note 12/10 (Washington: International Monetary Fund).
- Blanchard, O., 2005, “Fiscal Dominance and Inflation Targeting: Lessons from Brazil,” in F. Giavezzi, I. Godfajn, S. Herrera (eds.), Inflation Targeting, Debt, and the Brazilian Experience, 1999-2003 (Cambridge: MIT Press).

### Country experiences, historical perspectives, and special topics
- Bernanke, B. S., and I. Mihov, 1997, “What Does the Bundesbank Target?” European Economic Review 41, no. 6 (June): 1025-53.
- Flandreau, M., 2008, “Pillars of globalization: a history of monetary policy targets, 1797-1997”, in Beyer, A and L. Reichlin (eds.), The Role of money – Money and monetary policy in the twenty-first century, 208-43.
- Kimura, T., 2001, “The impact of financial anxieties on money demand in Japan,” in Klöckers, H-J and C. Willeke (eds.) Monetary analysis: tools and applications, 97-116.
- King, M., 1994, “Monetary policy in the UK,” Fiscal Studies 15, no. 3, 109-28.
- King, M., 2002, “No money, no inflation – the role of money in the economy,” Bank of England Quarterly Bulletin, Summer, 162-77.
- Yates, T., 2003, “Monetary policy and the zero bound to nominal interest rates,” Bank of England Quarterly Bulletin, Spring, 27-37.
- Draghi, M., 2014, “Monetary policy in the euro area,” Speech at the Frankfurt Banking Congress, November 21.
- Grant, K., G. Vlieghe, and A. Brigden, 2004, “Assessing the stability of narrow money demand in the United Kingdom,” Bank of England Quarterly Bulletin, Summer, 131-41.
- Gerlach, S., 2004, “The pillars of the ECB,” Economic Policy, Vol. 40, 389-439.
- Kahn, G.A. and S. Benolkin, 2007, “The role of money in monetary policy: Why do the Fed and the ECB see it so differently?” Federal Reserve of Kansas City Economic Review, Third Quarter, 5-36.
- Maehle, N., forthcoming, “Monetary Policy Implementation: Operational Issues for Countries with Evolving Monetary Regimes” (Washington, International Monetary Fund).

*Source: _wp15136 - REFERENCES*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp15136.pdf_