Money Stock Targeting and Money Supply: A Closer Examination of the Data

Abstract

In a recent paper Mercenier and Sekkat (1988) use a linear-quadratic model to examine the willingness of a monetary authority in a small open economy to target its exchange rate. Based on their empirical results, the authors conclude that the Bank of Canada has displayed a willingness to use the money supply to target the Canada-US exchange rate. We re-examine their empirical results using a different estimation approach and with different assumptions about the forcing process of the exogeneous variables. We also extend the sample period to include more recent observations. While we find some weak evidence to support their conclusion, the results, in general, suggest that a linear-quadratic model may not be a particularly useful representation of the assumed exchange rate targeting by a monetary authority.

Keywords: Money Supply, Linear Quadratic Model, Forcing Process, Stationarity, Nonstationarity

JEL Classification: C22,C32, C51, G21, E41