Some Thoughts on Monetary Targeting vs. Inflation Targeting

Cabos, Karen; Funke, Michael; Siegfried, Nikolaus A

doi:10.1111/1468-0475.00035

Cited by 7 publications

(5 citation statements)

References 16 publications

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“…Therefore, the use of monetary targeting can be reconsidered in the case of Indonesia. The evaluation needs to be based on the effectiveness of monetary targeting, which entails the functioning of monetary fundamentals in the sense that the growth rates of money are strongly associated with the monetary policy's tools (Cabos et al, 2001). By keeping the stability of the Indonesian currency in focus, monetary fundamentals are proposed to determine the exchange rate in Indonesia via the estimation of the monetary exchange rate model.…”

Section: Introductionmentioning

confidence: 99%

The Impact of Divisia Money on Monetary Model of Exchange Rate in Indonesia

Leong¹,

Puah²,

Liew³

2018

Economics &Amp; Sociology

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Stability of the exchange rate is critical for policy formulation in Indonesia and thus, has boosted the study of exchange rate behaviour. In this study, the monetary model of exchange rate has been utilised to determine the exchange rate for Indonesia. The model was improved by means of including the Divisia monetary aggregate as the money measure instead of conventional money supply. The ARDL approach, which was valid in spite of the variables' stationary properties, was used for the estimation. The findings indicated that monetary fundamentals are significant in explaining the exchange rate movements in Indonesia when Divisia money was incorporated into the monetary model of the exchange rate. As a result, monetary fundamentals can serve as the determinants of exchange rate in addition to non-monetary fundamentals in the case of Indonesia. High magnitude of the money supply differential and the real income differential coefficients also implied that monetary targeting can serve as a useful instrument for monetary policy in addition to inflation targeting. The research is based on the data ranging from 1984Q1 to 2017Q1.

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Section: Introductionmentioning

confidence: 99%

The Impact of Divisia Money on Monetary Model of Exchange Rate in Indonesia

Leong¹,

Puah²,

Liew³

2018

Economics &Amp; Sociology

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“…Therefore, the controllability of the monetary aggregate by the central bank has been analysed by Cabos, Funke and Siegfried (1999). Employing Markov-Switching Models they analyse the link between monetary policy actions and inflation and find that control problems with respect to money are slightly higher in a monetary targeting strategy than in an inflation targeting regime.…”

Section: Introductionmentioning

confidence: 99%

Monetary transmission in Germany: Lessons for the Euro area

Hubrich

Vlaar

2004

Empirical Economics

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This study analyses the transmission of monetary policy in Germany for the EMS period in the framework of a structural vector error correction model (S-VECM). Three stable cointegration relationships are found: a money demand relation, an interest rate spread and a stationary real interest rate. Based on both contemporaneous and long-run restrictions, five structural shocks to the economy are identified.In contrast to analyses for the euro area, we find that output and inflation are not independent in the long run for Germany. In accordance with results previously found for Europe, we do not find strong support for monetary targeting for Germany. Our analysis indicates that uncertainties remain concerning the controllability of money and its usefulness as a leading indicator with respect to inflation. Stability of the money demand relationship does not seem to be problematic.

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“…Laubach The empirical study by Rudebusch and Svensson (2002) has revealed that monetary targeting is quite inefficient, yielding both higher inflation and output variability and therefore, there is no support for the prominent role given to money growth in the Eurosystem's monetary policy strategy. That of Cabos et al (2003) also supports that control problems involved in targeting broad or narrow money are larger than these associated to adopting direct inflation targets. The Bundesbank's success story of monetary targeting is then explained as due to that their monetary policy is actually closer in practice to inflation targeting than it is to Friedmanlike monetary targeting and thus might best be thought of as "hybrid" inflation targeting.…”

Section: Several Economists Advocate That If Money Demand Is Stable Amentioning

confidence: 81%

The Design of a 'Two-Pillar' Monetary Policy Strategy

Dai

2009

SSRN Journal

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Abstract:In this paper, it is argued that money supply in a narrow sense and repo interest rate are two independent monetary policy instruments when the effect of interest rate policy cannot be efficiently transmitted to the economy through the monetary and financial markets. In this case, the control of money supply is necessary to reduce the discrepancy between the repo interest rate and the interest rates at which private agents lend and borrow. Using a simple macro-economic model, this study shows how a two-pillar monetary policy strategy as practiced by the European central bank (ECB) can be conceived to guarantee macroeconomic stability and the credibility of monetary policy. This strategy can be interpreted as a combination of inflation targeting and monetary targeting. Well conceived monetary targeting with a commitment to a long-run money growth rate corresponding to inflation target could reinforce the credibility of central bank announcements and the role of inflation target as strong and credible nominal anchor for private inflation expectations. However, an inflation-targeting regime associated with Friedman's money supply rule can generate dynamic instability in output, inflation and money demand. Three feedback monetary targeting rules, of which the design depends on economic structure and central bank preferences, are discussed relative to their capability of warranting macroeconomic stability.

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Some Thoughts on Monetary Targeting vs. Inflation Targeting

Cited by 7 publications

References 16 publications

The Impact of Divisia Money on Monetary Model of Exchange Rate in Indonesia

The Impact of Divisia Money on Monetary Model of Exchange Rate in Indonesia

Monetary transmission in Germany: Lessons for the Euro area

The Design of a 'Two-Pillar' Monetary Policy Strategy

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