The Use of Monetary Aggregates as Indicators of the Future Evolution of Consumer Prices: Monetary Growth and Inflation Target

Manuel Ramos Francia, Antonio Noriega (anoriega@banxico.org.mx) and Rodríguez-Pérez Cid Alonso

No 2015-14, Working Papers from Banco de México

Abstract: We construct inflation pressure indicators based on the long-run relationship that exists between monetary aggregates and prices, once it is adequately adjusted to account for the scale of transactions, as well as the opportunity cost of holding money. To that end, an extensive long-run econometric analysis of money demand is carried out for Mexico using the monetary aggregate M1. Based on it, two indicators are calculated, the money gap and the m* indicator. Such gap measures deviations of real M1 from its relationship with its long-run determinants. The m* indicator is based on the estimation of the price index which is congruent with the quantity of M1 in the economy once it is adjusted for the long-run tendency of its determinants considering its long-run coefficients. Our results indicate that monetary policy has been congruent with the inflation target of Banco de México.

Keywords: Money demand; inflation; money gap; autoregressive distributed lag model; cointegration; general-to-specific; stability/structural change (search for similar items in EconPapers)
JEL-codes: C22 C32 E31 E41 E51 (search for similar items in EconPapers)
Date: 2015-07
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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