Chapter

III Monetary Policy

Author(s):
Charalambos Christofides, Atish Ghosh, Uma Ramakrishnan, Alun Thomas, Laura Papi, Juan Zalduendo, and Jun Kim
Published Date:
September 2005
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Beyond the exchange rate (and, under flexible exchange rates, the monetary) regime, the authorities must also specify the monetary stance under their IMF-supported economic programs. This section therefore discusses the monetary stance in terms of the behavior of broad money. Since the monetary authorities typically control (or have influence over) narrow aggregates, a first question concerns the mapping between narrow and broad money—that is, behavior of the money multiplier. It turns out that this relationship is generally stable and well predicted in programs, making it appropriate to consider the monetary stance in terms of broad money aggregates (Box 4.3). This section therefore considers broad money growth rates and velocity targeted in IMF-supported programs and their relationship to program objectives. It then examines the impact of monetary policy on inflation and growth. In particular, does a tighter monetary stance contribute to lower inflation? Do overruns of broad money growth account for cases where program inflation targets were missed; and does the composition of this overrun (between net domestic assets and net foreign assets) matter for inflation performance? Was the monetary stance associated with lower output growth?

Programmed Monetary Stance

Across various IMF-supported programs, broad money growth rates are targeted to decline, as are inflation rates (Table 4.8). The higher the initial inflation rate and rate of monetary expansion, the greater the targeted deceleration. For countries whose initial inflation was below 20 percent a year, the targeted deceleration was modest—from 12 percent in the year prior to program approval to 10 percent in the year following program approval. For countries whose initial inflation exceeds 50 percent a year, the deceleration is more marked, declining to annual rates of 13 percent in the year following program approval.17

Table 4.8.Programmed Money Growth, Velocity, and Inflation(In percent)
Broad Money Growth1Velocity Growth2Inflation1
t–1tt+1t–1tt+1t–1tt+1
1.Full sample19.514.511.36.45.30.417.212.26.1
Inflation at t–1 < 20%12.010.310.75.0–0.7–0.56.96.44.5
20% < inflation at t–1 < 50%19.716.713.02.36.04.423.916.58.8
Inflation at t–1 > 50%52.630.812.718.631.7–0.355.833.910.3
2.GRA-supported22.616.911.811.39.21.120.915.97.0
Nontransition12.411.010.714.13.52.010.29.75.5
Transition36.925.016.37.316.9–2.236.024.89.5
Inflation at t–1 < 20%12.510.911.310.9–1.20.46.87.64.9
20% < inflation at t–1 < 50%18.217.314.43.26.56.623.418.710.1
Inflation at t–1 > 50%54.733.011.121.242.1–2.558.238.210.7
3.PRGF-supported15.411.610.8–0.10.2–0.212.37.24.9
Nontransition12.710.310.0–0.20.30.09.25.84.3
Transition31.618.816.00.40.1–1.631.115.48.7
Inflation at t–1 < 20%11.49.710.2–0.8–0.2–1.17.05.24.2
20% < inflation at t–1 < 50%22.115.711.90.95.12.624.713.06.8
Inflation at t–1 > 50%44.722.615.86.8–4.73.946.717.99.1
Sources: IMF, MONA and WEO databases; and IMF staff estimates.

Money growth and inflation are end-period figures and transformed to be mapped into (–100,100) percent.

For nontransition economies, programmed velocity growth for year t and t+1 is relative to trend velocity growth as measured by the five-year historical average; velocity is defined as nominal GDP divided by (period-average) stock of broad money.

Sources: IMF, MONA and WEO databases; and IMF staff estimates.

Money growth and inflation are end-period figures and transformed to be mapped into (–100,100) percent.

For nontransition economies, programmed velocity growth for year t and t+1 is relative to trend velocity growth as measured by the five-year historical average; velocity is defined as nominal GDP divided by (period-average) stock of broad money.

Nominal money growth provides one gauge of the intended monetary stance, but it does take account of the increase in money demand associated with either real growth or inflation projected under the program.18 A simple metric is the expected change in money velocity—with an increase relative to the historical trend indicating that a tighter monetary stance was envisaged (though a decrease need not indicate a monetary loosening if inflation is expected to decline).19 By this metric, programs in high-inflation countries sought significant monetary tightening, especially in the GRA sample (see Table 4.8).

To examine more systematically the determinants of the programmed monetary stance (as captured by program velocity), Table 4.9 reports the results of a regression of the programmed change in broad money velocity. Higher initial inflation and a larger targeted improvement in the current account balance should call for a tighter monetary stance (an increase in programmed velocity), while a larger output gap, a flexible exchange rate, or a higher expected rate of remonetization of the economy (proxied by the targeted decline in inflation) would, ceteris paribus, argue for a looser stance. For GRA-supported programs, all variables have the expected signs and are statistically significant. Overall, the regression explains some 60 percent of the variation in velocity in GRA-supported nontransition programs. Among PRGF-supported programs and programs in transition economies, the most important determinants are the lagged inflation rate and the expected inflation decline, while the exchange rate regime is not statistically significant; nonetheless, the regression explains some 50 percent of the variation in transition economies but only about 35 percent of the variation in PRGF-supported programs.

Table 4.9.Programmed Monetary Stance: Regression Results1
Dependent Variable: Monetary Stance2
Regressor3Nontransition GRA-supportedNontransition PRGF-supportedTransition economies
Initial inflation0.937***1.011***1.207***
Initial output gap4–1.102***0.428–1.693***
Change in current account balance0.763*0.731*1.264
Change in inflation0.545***1.802***1.361**
Flexible exchange regime–2.142***0.352–1.219
Constant2.245–3.969–13.619
R20.6090.3400.522
Number of observations384336
Sources: IMF, MONA and WEO databases; and IMF staff estimates.

Significant at *** 1 percent, ** 5 percent, and * 10 percent levels.

Monetary stance is measured as programmed velocity growth in year t relative to trend velocity growth (as measured by the five-year historical average).

The current account balance (net of official transfers) is in percent of GDP; inflation was transformed to be mapped into an interval (–100,100) percent to reduce the influence of outliers.

Output gap is defined as a percentage deviation of real GDP from its Hodrick-Prescott filtered trend; positive value implies current output below trend.

Sources: IMF, MONA and WEO databases; and IMF staff estimates.

Significant at *** 1 percent, ** 5 percent, and * 10 percent levels.

Monetary stance is measured as programmed velocity growth in year t relative to trend velocity growth (as measured by the five-year historical average).

The current account balance (net of official transfers) is in percent of GDP; inflation was transformed to be mapped into an interval (–100,100) percent to reduce the influence of outliers.

Output gap is defined as a percentage deviation of real GDP from its Hodrick-Prescott filtered trend; positive value implies current output below trend.

Box 4.3.Relationship Between Program and Actual Money Multiplier

The text discusses the programmed monetary stance—and its impact on key macroeconomic targets—in terms of the behavior of broad money (and the velocity of broad money). Since national authorities typically control (or have more direct influence over) narrower monetary aggregates, this raises questions about the stability of the money multiplier, and whether errors in projecting the money multiplier are an important source of program slippages.

The table below seeks to examine the behavior of money multiplier—defined as the ratio of broad money to reserve money—in IMF-supported programs that were arranged during 1995–2000. The actual money multiplier has remained remarkably stable around its historical average across all types of programs (top panel): the null hypothesis of a constant multiplier cannot be rejected by the data. In addition, according to the regression results (bottom panel), program multiplier appears to be a good predictor of the actual multiplier (none of the reported F-statistics are statistically significant), accounting for more than 80 percent of cross-country variation. As such, the link between narrow and broad money aggregates is relatively stable and predictable.

Money Multiplier: Program Versus Actual1
Average (t–5: t–1)Year t–1Year tYear t+1H0: Constant Multiplier2
1.Actual money multiplier (mmA)
Nontransition GRA-supported6.226.336.436.290.01
Nontransition PRGF-supported2.412.492.492.540.20
Transition economies2.372.392.372.370.03
b0b1R2H0: b0 = 0 and b1 = 12
2.Regression results: mmA = b0 + b1mmP3
Year t
GRA-supported–0.1330.994***0.8941.145
PRGF-supported0.4120.801***0.8112.538
Transition economies–0.1611.048***0.8472.101
Pooled (year t and t+1)
GRA-supported0.0380.932***0.8381.391
PRGF-supported0.2910.891***0.8080.870
Transition economies–0.0831.029***0.8440.098
Sources: IMF, International Financial Statistics and MONA and WEO databases; and IMF staff calculations.

Money multiplier is defined as the ratio of broad money to reserve money; year t refers to the year of program approval; significant at * 10 percent, ** 5 percent, and *** 1 percent levels.

F-statistics are reported.

mmA and mmP refer to actual and program multiplier, respectively. Due to limited data availability, the sample of GRA- and PRGF-supported programs includes both transition and nontransition country programs.

Sources: IMF, International Financial Statistics and MONA and WEO databases; and IMF staff calculations.

Money multiplier is defined as the ratio of broad money to reserve money; year t refers to the year of program approval; significant at * 10 percent, ** 5 percent, and *** 1 percent levels.

F-statistics are reported.

mmA and mmP refer to actual and program multiplier, respectively. Due to limited data availability, the sample of GRA- and PRGF-supported programs includes both transition and nontransition country programs.

Experience

Inflation

IMF-supported programs generally succeed in reducing inflation—though by not as much as targeted. Slippages in the year of program approval were generally modest, about 1½ percent a year across GRA-supported programs and ½ percent a year in PRGF-supported programs, though as much as 5 percent per year for countries whose starting inflation rates were between 20 percent and 50 percent a year. In addition, for the following year, inflation was, on average, higher than programmed by about 4½ percent a year in GRA-supported programs and 2½ percent a year in PRGF-supported programs (Table 4.10). The decline in inflation was driven in part by lower money growth rates. Moreover, a given growth rate of the money supply in the context of an IMF-supported program is associated with lower inflation, possibly because greater credibility in the authorities’ policies engenders confidence in the currency and thus raises money demand (Box 4.4). In GRA-supported programs, this effect is both economically and statistically significant—ceteris paribus, inflation is 10 percentage points lower (in the year following program approval) under an IMF-supported program than it would be under similar money growth rates but without a program. The effect is weaker and not statistically significant among PRGF-supported countries.

Table 4.10.Programmed and Actual Inflation, Money Growth, and NDA Contribution
Projection Error1
Actual Inflation2InflationBroad money growthNDA contribution3
tt+1tt+1tt+1tt+1
1.Full sample13.39.41.13.62.92.922.37.5
Inflation at t–1 < 20%6.475.572.1–0.26.44.529.54.6
20% < inflation at t–1 < 50%22.118.75.510.54.613.12.014.8
Inflation at t–1 > 50%34.917.51.06.85.49.4–32.729.0
2.GRA-supported17.611.11.64.54.05.824.59.9
Nontransition11.08.51.33.63.43.433.612.1
Transition27.214.82.15.94.814.82.1–6.4
Inflation at t–1 < 20%7.35.3–0.30.93.31.035.812.8
20% < inflation at t–1 < 50%24.422.45.712.34.124.84.8–21.0
Inflation at t–1 > 50%41.919.03.78.06.311.3–32.731.4
3.PRGF-supported7.77.20.52.71.60.419.75.6
Nontransition7.66.81.82.71.11.717.28.8
Transition8.29.8–7.32.84.5–7.436.3–8.1
Inflation at t–1 < 20%5.75.80.51.80.9–1.022.8–2.5
20% < inflation at t–1 < 50%18.312.65.27.55.35.4–1.532.7
Inflation at t–1 > 50%8.812.1–9.13.11.95.626.5
Sources: IMF, MONA and WEO databases; and IMF staff estimates.

Projection errors are calculated as actual minus program values after transformation.

Transformed to be mapped into (–100,100) percent.

NDA contribution is defined as ΔNDAM, where Δ indicates level difference.

Sources: IMF, MONA and WEO databases; and IMF staff estimates.

Projection errors are calculated as actual minus program values after transformation.

Transformed to be mapped into (–100,100) percent.

NDA contribution is defined as ΔNDAM, where Δ indicates level difference.

While lower money growth contributed to the disinflation achieved, money growth tended to be higher than programmed—by about 4 percent in the year of program approval and 6 percent the following year in GRA-supported countries, and 1.6 percent and 0.4 percent, respectively, in PRGF-supported countries. Again, among countries starting with high inflation rates, the slippages are considerably greater—as much as 25 percent in the year following program approval in GRA-supported countries (Table 4.10). Table 4.11 seeks to explain some of the factors behind the slippage in broad money growth. In part, higher broad money growth reflects the effect of depreciation of the nominal exchange rate on foreign currency deposits—the only variable statistically significant for the sample of transition economies. Beyond this effect, among nontransition economies, fiscal slippages are correlated with money growth slippages, while the performance of output growth appears to have little explanatory power (except for GRA-supported programs in year t+1). Finally, a larger programmed decline in inflation is associated with larger money growth slippages, presumably reflecting the difficulty of achieving ambitious disinflations. Overall, the regressions have greater difficulty in explaining slippages during the first program year, accounting for only 9 percent to 25 percent of the variation, but somewhat greater success in accounting for slippages in the subsequent year.

Table 4.11.Determinants of Broad Money Growth: Regression Results1
Dependent Variable: ΔmER2Regressor2R2Number of Observations
ConstantΔexrERΔfbalERΔyERΔπP
All programs
Year t2.729***0.152–0.3150.1980.0370.032117
Year t+1–1.5540.345***0.2740.341–0.929***0.50165
Year t and t+1 (pooled)2.020**0.301***–0.0320.357–0.0760.096182
Fixed31.824–0.087–0.4020.258–0.0340.02698
Flexible32.466*0.421***0.5960.470–0.0420.26084
Nontransition GRA-supported4
Year t2.344–0.145–0.2770.169–0.4010.08933
Year t+10.2400.013–1.360**0.766*–0.708***0.60322
Year t and t+1 (pooled)1.662–0.147–0.809*0.440–0.597***0.26155
Fixed31.620–0.489***–1.144**0.111–0.704***0.50336
Flexible31.1290.263*0.7130.7130.0940.27719
Nontransition PRGF-supported
Year t–0.2950.829***–1.099**0.182–0.1590.24645
Year t+1–4.274***0.537***0.3330.244–2.346***0.51431
Year t and t+1 (pooled)–1.0460.685***–0.5200.458–0.3000.21476
Fixed3–2.7250.589**–0.5690.501–0.2160.15237
Flexible30.7990.696***–0.3580.166–0.2570.25239
Transition economies
Year t5.109**0.769*–0.3990.8990.0840.15233
Year t+1–6.3840.4012.1410.730–0.9350.71511
Year t and t+1 (pooled)2.9920.580***0.4550.2090.0200.26144
Fixed33.6350.3660.1690.3210.0780.05523
Flexible32.8250.524*0.996–0.181–0.0960.37821
Sources: IMF, MONA and WEO databases; and IMF staff estimates.

*** significant at 1 percent, ** significant at 5 percent, and * significant at 10 percent levels.

ΔmER, ΔyER, ΔexrER and ΔfbalER represent projection error in broad money growth, real GDP growth, percentage change in the nominal exchange rate (national currency per U.S. dollar) and fiscal balance in percent of GDP, respectively; ΔπP refers to programmed change in inflation; projection errors are calculated as actual minus program values after transformation that maps underlying variables into an interval (–100,100) percent.

Exchange rate regimes are classified by AREAER; “fixed regimes” include no separate legal tender, currency board arrangement, other conventional pegs, pegs with horizontal bands, crawling pegs, and crawling bands; “flexible regimes” include managed and independent floats.

Excludes capital account crisis programs.

Sources: IMF, MONA and WEO databases; and IMF staff estimates.

*** significant at 1 percent, ** significant at 5 percent, and * significant at 10 percent levels.

ΔmER, ΔyER, ΔexrER and ΔfbalER represent projection error in broad money growth, real GDP growth, percentage change in the nominal exchange rate (national currency per U.S. dollar) and fiscal balance in percent of GDP, respectively; ΔπP refers to programmed change in inflation; projection errors are calculated as actual minus program values after transformation that maps underlying variables into an interval (–100,100) percent.

Exchange rate regimes are classified by AREAER; “fixed regimes” include no separate legal tender, currency board arrangement, other conventional pegs, pegs with horizontal bands, crawling pegs, and crawling bands; “flexible regimes” include managed and independent floats.

Excludes capital account crisis programs.

Box 4.4.Does IMF Support Engender Confidence in Disinflation Efforts?

Beyond the effects of slower money growth on inflation, if IMF support enhances the credibility of the authorities’ policies then this should be reflected in greater confidence in the currency and higher money demand. Higher money demand, in turn, should result in lower inflation for a given growth rate of money. To test this hypothesis, it is useful to consider a standard money demand function:

where m is broad money, p the consumer price index, y is real GDP, and v is (residual) velocity. Inverting and taking first differences yields:

where the behavior of velocity is assumed to reflect the additional confidence that IMF support might impart.

Equation (2) is estimated for both low- and middle-income countries that had an IMF-supported program at some point during the period 1990–2000 and whose inflation is above 10 percent a year.

The results in the table for upper- and lower-middle-income countries suggest that, while IMF support has little immediate effect on confidence and inflation (in part because inflation in the current year may be largely determined), it has an economically and statistically significant impact by the following year; ceteris paribus, lowering inflation by as much as 10 percentage points.

The confidence effects of IMF support in low-income countries are much weaker (ceteris paribus, lowering inflation by 3 percentage points) and not statistically significant. Although broad money growth is highly significant in both regressions, the residual standard error is 15 percent a year in the low-income country regression compared to 7 percent a year in the middle-income country regression.

Inflation and Money Growth Under IMF-Supported Programs: Regression Results1
Dependent variable: π2Regressor2R2Number of Observations
Constantprogprog–1ΔmΔy
Middle-income countries0.07*–0.02–0.10***1.00***–1.250.63222
Low-income countires0.09*–0.02–0.030.91***–1.270.71205
Source: IMF staff estimates.

*** significant at 1 percent, ** significant at 5 percent, and * significant at 10 percent levels.

π,Δm, and Δy represent inflation, broad money growth, and real GDP growth, respectively; prog is a dummy variable indicating an IMF-supported program; Δm and Δy are instrumented with their own lags; annual dummies are also included in the regression (not reported).

Source: IMF staff estimates.

*** significant at 1 percent, ** significant at 5 percent, and * significant at 10 percent levels.

π,Δm, and Δy represent inflation, broad money growth, and real GDP growth, respectively; prog is a dummy variable indicating an IMF-supported program; Δm and Δy are instrumented with their own lags; annual dummies are also included in the regression (not reported).

In turn, Figure 4.3 correlates the slippage in broad money growth to the higher-than-programmed inflation rates. The relationship is statistically significant and—for the subsample in which money growth was higher than programmed—accounts for 30–60 percent of the variation of inflation projection error. The inflationary impact of monetary overruns naturally depends on whether there was a concomitant increase in money demand. A common hypothesis, in this regard, is that monetary expansions that reflect higher net foreign assets correspond to capital inflows responding to higher money demand, and should thus have a smaller inflationary impact; conversely, monetary overruns that reflect larger NDA growth than programmed should have a larger inflationary impact. Empirically, however, the source of the monetary overrun makes no difference to the inflationary impact (Table 4.12). This underscores the finding above that a NDA/NIR framework is not well suited to controlling inflation, which generally requires a more explicit nominal anchor. It also underscores the need to sterilize capital inflows or large donor support if the inflation target is to be achieved.20

Figure 4.3.Projection Errors in Inflation and Money Growth1

Sources: IMF, MONA and WEO databases; and IMF staff estimates.

1Projection errors are defined as actual minus projection; *significant at 10 percent, **significant at 5 percent, and ***significant at 1 percent levels.

2Subsample includes observations with positive projection error in money growth only.

Table 4.12.Projection Errors in Inflation and Money Growth: Regression Results1
Dependent Variable: INFER2Regressor2R2Number of Observations
ConstantMGERD50D90D50•MGERD90MGERNDAMG
A. Regression with no dummy
1.Full sample
GRA-supported
Year t2.106*0.228**0.15362
Year t +10.1210.335**0.40628
Year t and t +1 (pooled)1.4810.253***0.21990
Fixed30.9580.167*0.18559
Flexible31.8510.383***0.31631
PRGF-supported
Year t0.2050.0650.07453
Year t +1–0.7080.295***0.45936
Year t and t +1 (pooled)–0.0680.164**0.22389
Fixed31.662*–0.0970.46236
Flexible3–2.191*0.400***0.32253
2.Subsample: MGER > 0 only
GRA-supported
Year t–2.644*0.604***0.36037
Year t +1–3.464**0.685***0.64119
Year t and t +1 (pooled)–2.931**0.625***0.43756
Fixed3–2.450*0.504***0.41839
Flexible3–3.1210.732***0.44117
PRGF-supported
Year t–6.221***0.844***0.33834
Year t +1–6.663***1.153***0.87120
Year t and t +1 (pooled)–7.151***1.073***0.70754
Fixed3–2.664*0.573***0.68522
Flexible3–8.627***1.238***0.76332
B. Regression including NDA dummy
1.D50NDAM > 50%)
Year t0.2120.168*0.0560.0650.20564
Year t +10.5600.364***–2.212–0.0610.47438
Year t and t +1 (pooled)0.3980.236**–0.6660.0370.314102
Fixed30.1270.169*–0.850–0.0740.48554
Flexible30.1890.295*–0.7290.1450.28348
2.D90NDAM > 50%)
Year t0.8240.261*–1.136–0.1940.23464
Year t +10.3430.298**–1.9690.0990.46838
Year t and t +1 (pooled)0.6170.268***–1.548–0.0250.323102
Fixed3–0.0430.101–1.1100.1610.49054
Flexible30.4600.464***–1.806–0.2110.31048
C. Regression including NDA contribution to money growth
Year t0.2450.203*0.0030.20364
Year t +1–0.1510.355***–0.0180.45938
Year t and t +1 (pooled)0.0980.260***–0.0060.313102
Fixed3–0.1500.164**–0.0540.50154
Flexible3–0.2100.371***0.0010.27648
Sources: IMF, MONA and WEO databases; and IMF staff estimates.

All regressions include as a control variable projection error in fiscal balance; significant at * 10 percent, ** 5 percent, and *** 1 percent levels.

INFER and MGER refer to projection errors in inflation (end-period) and broad money growth, respectively; D50 and D90 are dummy variables that equal 1 if ΔNDA/DM > 50 percent and ΔNDA/DM > 90 percent, respectively, and 0 otherwise; NDAMG represents the contribution of NDA to broad money growth.

Exchange rate regimes are classified by AREAER; “fixed regimes” include no separate legal tender, currency board arrangement, other conventional pegs, pegs with horizontal bands, crawling pegs, and crawling bands; “flexible regimes” include managed and independent floats.

Sources: IMF, MONA and WEO databases; and IMF staff estimates.

All regressions include as a control variable projection error in fiscal balance; significant at * 10 percent, ** 5 percent, and *** 1 percent levels.

INFER and MGER refer to projection errors in inflation (end-period) and broad money growth, respectively; D50 and D90 are dummy variables that equal 1 if ΔNDA/DM > 50 percent and ΔNDA/DM > 90 percent, respectively, and 0 otherwise; NDAMG represents the contribution of NDA to broad money growth.

Exchange rate regimes are classified by AREAER; “fixed regimes” include no separate legal tender, currency board arrangement, other conventional pegs, pegs with horizontal bands, crawling pegs, and crawling bands; “flexible regimes” include managed and independent floats.

Output Growth

While controlling inflation is usually the primary goal of monetary policy in IMF-supported programs, the monetary stance may also affect other macroeconomic variables—for instance, output growth. One concern is that tight monetary policies in IMF-supported programs may have deleterious effects on activity and output growth. In fact, the empirical evidence does not support the hypothesis that monetary policy has been tightened excessively in IMF-supported programs leading to lower output growth.21Table 4.13 (top panel) reports the results of a regression of output growth on the monetary stance, where the latter is instrumented by its programmed value.22 Only for the transition economies sample is the coefficient significant, and even in this case, the effect is numerically small: a 1 percentage point increase in velocity growth is associated with less than one-tenth of a percentage point decline in the output growth rate. Moreover, an unexpectedly tight monetary stance cannot explain growth projection errors.

Table 4.13.Monetary Stance, Growth, and External Adjustment: Regression Results1
Regressor2R2Number of Observations
ConstantΔv3Δv–1Δy–1ΔCA–1
A.Contenporaneous effect:I. Dependent variable: Δy2
Nontransition GRA-supported
Year t2.0480.0470.1380.05638
Year t+11.2680.1350.2630.16722
Year t and t+1 (pooled)2.300***–0.1110.0770.07260
Fixed43.209***–0.0930.315*0.21738
Flexible40.848–0.238–0.4170.18622
Nontransition PRGF-supported
Year t0.806–0.040–0.1250.06545
Year t+11.976–0.1200.5000.25231
Year t and t+1 (pooled)2.560***0.0240.313***0.13076
Fixed42.784**–0.0210.2240.08437
Flexible42.175**0.0910.379***0.22339
Transition economies
Year t0.4250.067**–0.1890.25435
Year t+10.6420.002–0.3020.24011
Year t and t+1 (pooled)1.765*–0.0370.498***0.33746
Fixed4–0.031–0.069**0.431***0.50824
Flexible44.016**0.0120.488**0.26322
B.Lagged effect:
Nontransition GRA-supported
Year t+12.326*–0.0290.1610.03938
Nontransition PRGF-supported
Year t+11.0210.0360.455**0.18246
Transition economies
Year t+13.500***0.048***0.651***0.61930
A.Contenporaneous effect:II. Dependent variable: ΔCA2
Nontransition GRA-supported
Year t2.4250.036–0.1250.05738
Year t+11.4960.080–0.340*0.24922
Year t and t+1 (pooled)2.251***0.041–0.251*0.15460
Fixed40.0460.146**–0.385***0.25438
Flexible45.024***–0.002–0.0230.29522
Nontransition PRGF-supported
Year t0.505–0.041–0.209*0.10145
Year t+13.582–0.107–0.369*0.20731
Year t and t+1 (pooled)1.209*–0.059–0.281**0.11476
Fixed41.941*–0.115–0.432*0.22137
Flexible4–0.1800.035–0.2290.07939
Transition economies
Year t0.9910.065***–0.221*0.28235
Year t+10.241–0.002–0.928***0.70511
Year t and t+1 (pooled)1.0840.052**–0.357***0.33946
Fixed40.6420.033–0.304**0.55124
Flexible41.6760.075–0.387*0.29722
B.Lagged effect:
Nontransition GRA-supported
Year t+11.198–0.005–0.344***0.23338
Nontransition PRGF-supported
Year t+12.805–0.004–0.431*0.16246
Transition economies
Year t+10.1020.034–0.502*0.18630
Sources: IMF, MONA and WEO databases; and IMF staff estimates.

All regressions include as a control the change in fiscal balance (instrumented by programmed change); significant at * 10 percent, ** 5 percent, and *** 1 percent levels.

Δv, Δy, and ΔCA represent velocity growth relative to trend velocity growth (as measured by the five-year historical average prior to year t), real GDP growth, and change in the current account balance (net of official transfers) in percent of GDP at t–1, respectively; all underlying variables are transformed to be mapped into an interval (–100,100) percent prior to taking differences; velocity is defined as nominal GDP divided by (period average) stock of broad money with an increase, ceteris paribus, indicating a tighter monetary stance.

Velocity growth (Δv) was instrumented by its own lag and programmed velocity growth (relative to trend velocity growth).

Exchange rate regimes are classified by AREAER; “fixed regimes” include no separate legal tender, currency board arrangement, other conventional pegs, pegs with horizontal bands, crawling pegs, and crawling bands; “flexible regimes” include managed and independent floats.

Sources: IMF, MONA and WEO databases; and IMF staff estimates.

All regressions include as a control the change in fiscal balance (instrumented by programmed change); significant at * 10 percent, ** 5 percent, and *** 1 percent levels.

Δv, Δy, and ΔCA represent velocity growth relative to trend velocity growth (as measured by the five-year historical average prior to year t), real GDP growth, and change in the current account balance (net of official transfers) in percent of GDP at t–1, respectively; all underlying variables are transformed to be mapped into an interval (–100,100) percent prior to taking differences; velocity is defined as nominal GDP divided by (period average) stock of broad money with an increase, ceteris paribus, indicating a tighter monetary stance.

Velocity growth (Δv) was instrumented by its own lag and programmed velocity growth (relative to trend velocity growth).

Exchange rate regimes are classified by AREAER; “fixed regimes” include no separate legal tender, currency board arrangement, other conventional pegs, pegs with horizontal bands, crawling pegs, and crawling bands; “flexible regimes” include managed and independent floats.

External Adjustment

A further reason for monetary restraint in IMF-supported programs is to promote external adjustment.23Table 4.13 (bottom panel) examines the impact of a tighter monetary stance on external adjustment. The results are broadly similar to those for output growth. Except for the transition economies sample, almost no coefficient is statistically significant—suggesting a limited role for monetary policy in targeting current account adjustment.

Summary

IMF-supported programs normally target and achieve a deceleration of broad money growth and a tightening of the monetary stance. Stabilization efforts undertaken in the context of IMF-supported programs appear to enjoy greater credibility such that, in GRA-supported programs, inflation is lower for a given rate of money growth; a similar impact in PRGF-supported programs was not found. Overruns in broad money growth—whether reflecting unanticipated NDA or NFA expansion—are associated with slippages in inflation performance relative to program targets. The high correlation between monetary aggregates and inflation reaffirms the importance of nominal anchors for controlling inflation.

Monetary policy appears to have played a limited role in regard to external adjustment and real activity. This suggests that, in terms of instrument assignment, monetary policy should be geared mainly toward inflation control, while fiscal and exchange rate policies take center stage in achieving the necessary external adjustment.

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