| Abstract: |
This paper analyzes the rapid growth of money (M1A) in the
Chilean economy that has coincided
with low inflation and a loosened monetary policy. This has
been advocated to assert that such
monetary growth is inconsistent with the inflation target.
This work is intended to prove such an
argument wrong. First, we present episodes occurred in other
lower-inflation countries, where
monetary aggregates have grown even faster than in Chile, without
resulting in higher inflation.
Second, we show that money trends are consistent with money
demand estimates, although these
are very volatile. Finally, we explain why in the context of
a monetary policy based on inflation
targeting, where the policy instrument is the interest rate,
it is possible for money to fluctuate
widely without jeopardizing the inflation target. Even if inflation
is associated to an excessive
increase in the amount of money, and monetary policy is neutral
over the long term, monetary
aggregates provide little information on inflationary pressures. |
Banco Central de Chile