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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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On the Role of Money Targets in the Monetary Policy Framework in SSA

On the Role of Money Targets in the Monetary Policy Framework in SSA

Insights from a New Keynesian Model with Incomplete Information

Chapter:
(p.143) Chapter 8 On the Role of Money Targets in the Monetary Policy Framework in SSA
Source:
Monetary Policy in Sub-Saharan Africa
Author(s):

Andrew Berg

Rafael Portillo

Filiz Unsal

Publisher:
Oxford University Press
DOI:10.1093/oso/9780198785811.003.0008

Many low-income countries continue to describe their monetary policy framework in terms of targets on monetary aggregates. This chapter extends the New Keynesian model to provide a role for ‘M’ in the conduct of monetary policy, and examine the conditions under which some adherence to money targets is optimal. In the spirit of Poole (1970), this role is based on the incompleteness of information available to the central bank, a pervasive issue in these countries. Ex ante announcements and forecasts for money growth are consistent with a Taylor rule for the relevant short-term interest rate. Ex post, the policymaker must choose his relative adherence to interest rate and money growth targets. The chapter shows that some adherence to previously set money targets can emerge endogenously from the signal extraction problem faced by the central bank. The chapter also provides an analytical representation of the factors influencing the degree of optimal target adherence.

Keywords:   Economic models, low-income countries, developing countries, monetary aggregates, monetary policy, money targeting, sub-Saharan Africa

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