Money rule exit strategy needed to curb output and price volatility
After stabilizing the economy, there is usually a surge in the demand for money, which can be challenging for policymakers. This surge, called financial infusion, leads to increased money in the economy and can cause volatility in output and prices. A study of 26 stabilization episodes found that money demand decreases before stabilization and then sharply increases afterward. The study suggests that transitioning from a money rule to an exchange rate or inflation target could be a way to manage the effects of financial infusion.