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

_IMF Working Papers, November 25, 2013_

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## Bibliographic details
- 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

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### Overview and objectives
- 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).

### Key empirical findings (Kenya)
- (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.

### Methodological contributions
- 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.

### Policy implications and analysis
- 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 and keywords
- 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

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## Content in this bundle

- **2.  Money Growth Target**
  - [2.  Money Growth Target (Markdown version)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp13239.pdf.md){rel="alternate" type="text/markdown"}
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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/money-targeting-in-a-modern-forecasting-and-policy-analysis-system-an-application-to-kenya-41067_