Some Issues of Monetary Policy

The policy debate which preceded the introduction of monetary targets by and large avoided the practical problems of controlling the money supply. Frequently, the impression was given that the money supply is an exogenous policy instrument, subject to exact measurement and precise control. In reality, the money supply is not a label for a rigorously defined single statistic, but a term describing a concept, or rather several distinct concepts, for which numerous different statistical representations have been proposed. The authorities cannot simply exogenise the money supply (on some definition or other); they can only affect it indirectly by influencing the actions of banks and depositors through, for example, the raising of Minimum Lending Rate or the imposition of the corset. In other words, the money supply is not an instrument but an intermediate target, a target which, given existing instruments and the existing institutional setting, is not at all easy to hit.