The purpose of the paper is to survey and discuss inflation targeting in the context of monetary policy rules. The paper provides a general conceptual discussion of monetary policy rules, attempts to ...clarify the essential characteristics of inflation targeting, compares inflation targeting to monetary targeting and nominal-GDP targeting, and draws some conclusions for the monetary policy of the European System of Central Banks.
Since the mid-1980s Bangladesh has implemented a loose form of monetary targeting under two exchange-rate régimes: a pegged system until May 2003 and a ‘managed floating’ exchange-rate system. Under ...both régimes, broad money has been used as an intermediate target to maintain price stability, which implies as the ultimate goal a relatively low and stable rate of inflation. Inflation in this country has, however, remained moderately high and volatile, especially during the 1970s under the pegged exchange-rate system. With the apparent ineffectiveness of the monetary-targeting system in achieving price stability, even following the 2003 ‘managed float’ of the currency, there has been some suggestion that it should be replaced by, say, inflation targeting. This paper forms an element of a fuller study of the issue. It investigates the behaviour of broad money demand in Bangladesh using annual data over the period 1973–2008. Empirical results suggest that an open-economy broad money demand function has remained stable in Bangladesh since the early 2000s. Empirical results also suggest the existence of a
causal relationship between money supply growth and inflation. The paper concludes that, although monetary targeting remains appropriate for Bangladesh, its implementation can be made more effective in stabilising the price level if the Bangladesh Bank enhances its control over the money supply by eschewing nominal exchange-rate stabilisation through foreign exchange market interventions.
This paper empirically addresses the questions “is money supply in Sri Lanka endogenous or exogenous and how much control does the Central Bank have over the money supply?” Thus the paper also ...examines the viability of the current monetary targeting policy regime. Two complementary approaches are used. The first is the monetarist approach and tests whether money supply is exogenously determined by testing the stability of the broad money multiplier and by testing for a long-run relationship between monetary base and broad money supply. The second approach tests the Post-Keynesian contention that the money supply is endogenous with the financial system as a whole causing changes to the money supply through bank lending creating monetary liabilities. The findings indicate the broad money multiplier is not stable and the tests of the endogenous money theory shed light on why it is unstable. The overall results cast doubt the effectiveness of the current monetary targeting policy regime in Sri Lanka.
The tug-o-war for supremacy between inflation targeting and monetary targeting is a classic, yet timely topic, in monetary economics. In this paper, we revisit this issue within the context of a ...pure-exchange, overlapping generations model in which spatial separation and random relocation create an endogenous demand for money. We study AR(1) shocks to both real output and the real interest rate. Irrespective of the nature of the shocks, the optimal inflation target is always positive. Under monetary targeting, shocks to output necessitate negative money growth rates; for shocks to real interest rates, money growth rates may be either positive or negative depending on the elasticity of consumption substitution. Also, for output shocks, monetary targeting welfare-dominates inflation targeting but the gap between the two vanishes as the shock process approaches a random walk. In sharp contrast, for shocks to the real interest rate, we prove that monetary targeting and inflation targeting are welfare-equivalent only in the limit as the shocks become i.i.d. The upshot is that persistence of the underlying fundamental uncertainty matters: depending on the nature of the shock, policy responses need to be either more or less aggressive as persistence increases.
The purpose of the present paper is twofold. First, we characterize the Fed's systematic response to technology shocks and its implications for U.S. output, hours and inflation. Second, we evaluate ...the extent to which those responses can be accounted for by a simple monetary policy rule (including the optimal one) in the context of a standard business cycle model with sticky prices. Our main results can be described as follows: First, we detect significant differences across periods in the response of the economy (as well as the Fed's) to a technology shock. Second, the Fed's response to a technology shock in the Volcker–Greenspan period is consistent with an optimal monetary policy rule. Third, in the Pre-Volcker period the Fed's policy tended to overstabilize output at the cost of generating excessive inflation volatility. Our evidence reinforces recent results in the literature suggesting an improvement in the Fed's performance.
Using a small empirical model of inflation, output, and money estimated on U.S. data, we compare the relative performance of monetary targeting and inflation targeting. The results show monetary ...targeting to be quite inefficient, yielding both higher inflation and output variability. This is true even with a nonstochastic money demand formulation. Our results are also robust to using a
P
∗
model of inflation. Therefore, in these popular frameworks, there is no support for the prominent role given to money growth in the Eurosystem's monetary policy strategy.
The first six years of ECB monetary policy are examined using a general framework that allows central bankers to weight differently positive and negative deviations of inflation, output and the ...interest rate from their reference values. The empirical analysis on synthetic euro-area data suggests that the objective of price stability is symmetric, whereas the objectives of real activity and interest-rate stabilizations are not. Output contractions imply larger policy responses than output expansions of the same size, while movements in the interest rate are larger when the level of the interest rate is relatively high. The hypothesis of M3 growth-rate targeting is rejected.
This paper, in the spirit of Poole Poole, William, 1970. The Optimal Choice of Monetary Policy Instruments in a Simple Macro Model. Quarterly Journal of Economics, 84, 192–216., studies how ...differently monetary and fiscal shocks influence the appropriate choice of the monetary policy regime. Velocity shocks are introduced by embedding a stochastic cash-in-advance constraint within the New Keynesian framework. In addition to optimal policy under discretion, three classic rules, interest rate targeting, monetary targeting, and the Taylor rule are ranked under both fiscal and velocity shocks. The non-stationarity of prices under the Taylor rule makes it inferior to the other rules under which prices are stationary. Monetary targeting, by stabilizing aggregate demand under fiscal shocks, outperforms interest rate targeting, while the latter provides a better insulation against velocity shocks. Monetary targeting (under fiscal shocks) and interest rate targeting (under velocity shocks) even outperform the optimal policy under discretion for sufficiently high intertemporal elasticities of consumption substitution.
Monetary Targeting Krušković, Borivoje D; Maričić, Tina
Journal of Central Banking Theory and Practice (Podgorica),
09/2015, Volume:
4, Issue:
3
Journal Article
Peer reviewed
Open access
In this paper we test the existence of long-term relationship between money supply and inflation, money supply and GDP and money supply and unemployment. Three independent panel cointegration ...regressions are evaluated where money supply is the explanatory variable, while inflation, GDP and unemployment rates occur as dependent variables. The sample consists of 17 countries (Australia, Canada, Chile, Denmark, Israel, Japan, South Korea, Mexico, New Zealand, Poland, Switzerland, United Kingdom and United States). The data are annual and refer to the period from 1990 to 2013. The results of the empirical analysis in this paper show that there is no significant long-term relationship between inflation and money supply, while there is statistically significant long-term relationship between GDP and money supply, as well as between unemployment rates and the money supply.
PDF
