The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Uruguay has recently reverted to a money targeting (MT) framework in the context of a
disinflation strategy. We develop a quantitative model for monetary policy analysis
incorporating money targets in the policy framework while also retaining a central role for
interest rates in the transmission of policy. We use the model to show that tight financial
conditions for a period may be necessary for inflation to converge to the middle of the target
band. We also discuss various aspects of the MT framework. Two issues stand out. Excessive
focus on hitting money targets can result in undesirable changes in the policy stance; while
targets that incorporate elements of money demand forecasting are superior to targets that are
excessively smooth or do not adjust for base effects.