UNDERSTANDING A MONETARY CONDITIONS INDEX

Abstract

Numerous central banks, governmental organizations, and businesses now calculate a Monetary Conditions Index (or MCI) as an indicator of the stance of monetary policy. Two central banks, for Canada and New Zealand, use their MCIs as operational targets. This paper describes and defines this concept, summarizes how central banks implement MCIs in practice, reviews some of the. operational and conceptual issues involved, and evaluates the sensitivity of MCIs to an inherent source of uncertainty in their calculation. Empirically, this uncertainty typically renders MCIs uninformative for their ostensible purposes, so some possible alternatives are considered.

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