Financial Infusion and Exiting from a Money Rule

Author/Editor:

Mark R. Stone

Publication Date:

March 1, 1998

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Money demand often surges after successful macroeconomic stabilization. This paper gives a name—financial infusion—to these surges because their size, unpredictability, and concurrence with other “success shocks” pose unique challenges to policy, especially under a money rule. An examination of 26 stabilization episodes shows that money to GDP can be expected to decline before stabilization and rise sharply thereafter. Analysis of the policy response to financial infusion under a money rule concludes that it amplifies output and price volatility, even if built into the rule. Finally, the main elements of an exit strategy from a money rule to an exchange rate or inflation target are discussed.

Series:

Working Paper No. 1998/031

Subject:

Demand for money Exchange rates Foreign exchange Inflation Inflation targeting Monetary base Monetary policy Money Prices

English

Publication Date:

March 1, 1998

ISBN/ISSN:

9781451980097/1018-5941

Stock No:

WPIEA0311998

Pages:

41

Please address any questions about this title to publications@imf.org