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

IMF Working Papers, November 25, 2013

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

Authors: Michal Andrle, Andrew Berg, Enrico G Berkes, Rafael A Portillo, Jan Vlcek
Published: November 25, 2013
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9781475538007.001

Extends the framework in Andrle and others (2013) to incorporate an explicit role for money targets and target misses in the analysis of monetary policy in low-income countries (LICs), with an application to Kenya.
Provides a general specification that can nest:
- money-targeting approaches (from targets based on optimal money demand forecasts to those derived from simple money growth rules),
- interest-rate based frameworks,
- and intermediate cases.
Acknowledges ex-post adherence to targets as an objective of policy in LICs and offers a novel interpretation of target misses in terms of structural shocks (aggregate demand, policy, shocks to money demand, etc).

(i) the setting of money targets is consistent with money demand forecasting.
(ii) targets have not played a systematic role in monetary policy.
(iii) target misses mainly reflect shocks to money demand.
Simulations under alternative policy specifications show that the stronger the ex-post target adherence, the greater the macroeconomic volatility.

Introduces a modeling framework that:
- explicitly models money targets and target misses,
- maps target misses to structural shocks (aggregate demand, policy, money demand shocks),
- nests a range of monetary-policy specifications from money-growth rules to interest-rate rules.

Highlights benefits of a model-based approach to monetary policy analysis in LICs, including in countries with money-targeting frameworks.
Suggests that strict ex-post adherence to money targets can increase macroeconomic volatility, implying a trade-off between target adherence and macroeconomic stability.

Subjects: Banking, Demand for money, Exchange rates, Foreign exchange, Inflation, Monetary aggregates, Monetary base, Money, Prices
Keywords: central bank, Demand for money, Exchange rates, Forecasting, Global, Inflation, interest rate, interest rate rule, Kenya, Low-Income Countries, Monetary aggregates, Monetary base, monetary policy, money demand, money demand demand shock, money growth, money market, money target, Money Targeting, target adherence, target miss, WP

2. Money Growth Target
- 2. Money Growth Target (Markdown version)
- 2. Money Growth Target (PDF)