On the role of money growth targeting under inflation targeting regime

Meixing Dai ()

Working Papers of BETA from Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg

Abstract: The mainstream inflation-targeting literature makes the strong assumption that the central bank can exactly target the interest rate which affects investment and consumption decisions and hence the money supply plays no role in the monetary policy strategy. This assumption is equivalent to admitting the perfect credibility of inflation target announced by the central bank, the perfect functioning of money and financial markets and that the central bank is willing to inject as much liquidity as the economic agents demand. Neither of these assumptions corresponds to the reality. In effect, the inflation expectations can not be easily anchored by the cheap talk of central bankers. On the other hand, the central bank may have many difficulties to target, in a context of financial instability, the interest rates which affect the real and financial decisions of private agents. We suggest that under inflation-targeting regime, money and credit markets vehicle the inflation expectations that can be anchored with a well-specified feedback money growth rule. The latter, in contrast to the Friedman’s k percent money growth rule, can help managing the inflation expectations in a manner to guarantee the dynamic stability of the economy. Furthermore, the model can be easily used to discuss the implications of the zero interest rate policy and the quantitative easing policy.

Keywords: Interest rate rule; imperfect money and credit markets; inflation targeting; monetary targeting; inflation expectations; Friedman’s k percent money growth rule; feedback money growth rule; macroeconomic stability; zero interest rate policy; quantitative easing policy. (search for similar items in EconPapers)
JEL-codes: E43 E44 E51 E52 E58 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://beta.u-strasbg.fr/WP/2009/2009-11.pdf (application/pdf)

Related works:
Working Paper: On the role of money growth targeting under inflation targeting regime (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ulp:sbbeta:2009-11

Access Statistics for this paper

More papers in Working Papers of BETA from Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg Contact information at EDIRC.
Bibliographic data for series maintained by ( this e-mail address is bad, please contact ).