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Monetary Policy in Sub-Saharan Africa$
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Andrew Berg and Rafael Portillo

Print publication date: 2018

Print ISBN-13: 9780198785811

Published to Oxford Scholarship Online: April 2018

DOI: 10.1093/oso/9780198785811.001.0001

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Do Money Targets Matter for Monetary Policy in Kenya?

Do Money Targets Matter for Monetary Policy in Kenya?

(p.309) Chapter 16 Do Money Targets Matter for Monetary Policy in Kenya?
Monetary Policy in Sub-Saharan Africa

Michal Andrle

Andrew Berg

Enrico Berkes

R. Armando Morales

Rafael Portillo

Jan Vlcek

Oxford University Press

The framework in Chapter 15 is extended to incorporate an explicit role for money aggregates, with an application to Kenya. The chapter provides 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. A novel interpretation of target misses in terms of structural shocks (aggregate demand, policy, shocks to money demand, etc.) is presented. In the case of Kenya, the authors 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.

Keywords:   Monetary policy, money targeting, forecasting, inflation, Kenya, Africa, low-income countries, developing countries, semi-structural models

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