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

By Michal Andrle, Andrew Berg, Enrico G Berkes, Rafael A Portillo, Jan Vlcek, R. Armando Morales

November 25, 2013

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Michal Andrle, Andrew Berg, Enrico G Berkes, Rafael A Portillo, Jan Vlcek, and R. Armando Morales Money Targeting in a Modern Forecasting and Policy Analysis System: an Application to Kenya, (USA: International Monetary Fund, 2013) accessed September 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We extend 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. We provide a general specification that can nest various types of money targeting (ranging from targets based on optimal money demand forecasts to those derived from simple money growth rules), interest-rate based frameworks, and intermediate cases. Our framework acknowledges that ex-post adherence to targets is in itself an objective of policy in LICs; here we provide a novel interpretation of target misses in terms of structural shocks (aggregate demand, policy, shocks to money demand, etc). In the case of Kenya, we find that: (i) the setting of money targets is consistent with money demand forecasting, (ii) targets have not played a systematic role in monetary policy, and (iii) target misses mainly reflect shocks to money demand. Simulations of the model under alternative policy specifications show that the stronger the ex-post target adherence, the greater the macroeconomic volatility. Our findings highlight the benefits of a model-based approach to monetary policy analysis in LICs, including in countries with money-targeting frameworks.

Subject: 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

Publication Details

Pages:

44
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/239
Stock No:

WPIEA2013239
ISBN:

9781475538007
ISSN:

1018-5941

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