On the Optimal Adherence to Money Targets in a New-Keynesian Framework: An Application to Low-Income Countries
IMF Working Papers, June 1, 2010
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Bibliographic details
- Authors: Andrew Berg, Filiz D Unsal, Rafael A Portillo
- Published: June 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455201174.001
Publication and authorship
- Authors: Andrew Berg, Filiz D Unsal, Rafael A Portillo
- Publication date: June 1, 2010
- Series: Working Paper No. 2010/134
- Issue: 134
- Volume: 2010
- Pages: 31
- DOI: https://doi.org/10.5089/9781455201174.001
- Stock No: WPIEA2010134
- ISBN: 9781455201174
- ISSN: 1018-5941
Research question and motivation
- Many low-income countries describe their monetary policy framework in terms of targets on monetary aggregates, a practice that contrasts with most modern discussions of monetary policy and with most practice.
- The paper extends the new-Keynesian model to provide a role for “M” (money) in the conduct of monetary policy and examines conditions under which adherence to money targets is optimal.
- The role for money follows the spirit of Poole (1970) and is motivated by incompleteness of information available to the central bank, identified as a pervasive issue in these countries.
Theoretical approach
- Ex-ante announcements/forecasts for money growth are modeled as being consistent with a Taylor rule for the relevant short-term interest rate.
- Ex-post, the policy maker chooses relative adherence to interest rate and money growth targets.
- Using the method in Svensson and Woodford (2004), the paper shows that optimal adherence to ex-ante targets is equivalent to a signal extraction problem: the central bank uses money market information to update its estimate of the state of the economy.
Empirical strategy
- The model is estimated using Bayesian methods.
- Country applications: Tanzania, Uganda (both de jure money targeters), and Ghana (a de jure inflation targeter).
- The empirical exercise compares de facto adherence to targets with the optimal use of money market information in each country.
Key themes and variables studied
- Demand for money
- Inflation
- Monetary aggregates
- Output gap
- Short term interest rates
- Keywords identified: interest rate, WP
Main contributions and implications
- Provides a new‑Keynesian framework where money plays an informational role for policymaking under incomplete information.
- Frames the policy tradeoff between following interest rate rules and adhering to money growth targets as a signal extraction problem.
- Presents country-level Bayesian estimates to evaluate how actual policymaking in Tanzania, Uganda, and Ghana compares with the model’s optimal use of money market signals.
IMF Working Papers, "On the Optimal Adherence to Money Targets in a New-Keynesian Framework: An Application to Low-Income Countries", Andrew Berg; Filiz D Unsal; Rafael A Portillo, June 1, 2010.