IMF paper offers Uruguay advice on money supply targeting

Uruguay's attempt to bring inflation under control using money supply targets has proved "challenging" and could benefit from some refinement, according to a working paper published by the International Monetary Fund on July 23.

A model for monetary policy analysis in Uruguay, by Rafael Portillo and Yulia Ustyugova, notes that while the shift to targeting monetary aggregates succeeded in imposing tight monetary policy, inflation has failed to come down. Partly this is due to the depreciation of the peso caused by the Federal Reserve's tapering announcement, the authors say.

To improve the framework, the Central Bank of Uruguay ought to focus more on money demand forecasting and the flexible use of interest rates rather than rigid attempts to hit targets. The authors outline a model of the Uruguayan economy that could improve policy-making.

"Going forward, bringing inflation back to the centre of the target range will require tight policies for the foreseeable future, both in terms of higher nominal and real interest rates and low broad money growth," the authors say.