Broad Money Demand and Monetary Policy in Tunisia

1. Central Banks in many countries rely on a money demand function both as a means to identify medium-term growth targets for the money supply, but also to manipulate interest rates and the reserve money for the purpose of controlling total liquidity in the economy. The usefulness of a money demand function in the conduct of monetary policy depends crucially on its stability. In the absence of a stable money demand function, monetary growth targets might be inconsistent with...
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1. Central Banks in many countries rely on a money demand function both as a means to identify medium-term growth targets for the money supply, but also to manipulate interest rates and the reserve money for the purpose of controlling total liquidity in the economy. The usefulness of a money demand function in the conduct of monetary policy depends crucially on its stability. In the absence of a stable money demand function, monetary growth targets might be inconsistent with developments in the real economy, interest rate targets may be out of line with the planned growth of the money supply and the targeted monetary aggregate might not be an appropriate reflection of total liquidity in the economy. In a number of countries (e.g., United States, Great Britain), demand for money functions were found to be unstable in the aftermath of financial sector reforms and the emergence of new financial assets. As a consequence, many Central Banks have abandoned monetary targets and base their monetary policy on a combination of indicators such as the exchange rate, nominal GDP or the inflation rate.