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Targets and Instruments of Monetary Policy

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Author Info
Benjamin M. Friedman
Abstract

The notion of targets and instruments is basic to the conceptual framework that economists have used to bring economic analysis to bear on practical issues of how central banks can and/or should conduct monetary policy. This paper surveys the literature of targets and instruments of monetary policy, focusing primarily on the progression of analytical developments during the past two decades. The two issues that have been most central to this entire line of research are the "instrument problem" -- what price or quantity the central bank should fix directly through its open market operations -- and the "intermediate target problem" -- what role (if any) the central bank should assign to variables that it cannot set directly but over which it can exert substantial influence (the most obvious example, of course, being the money stock). Other issues that have figured prominently in this literature include how best to control money growth, should the central bank choose to do so; the potential role of money, credit, and other financial variables as sources of information that might guide the central bank's operations; the implications of alternative policy frameworks for the information available to the economy's private sector; the positive empirical question of determining when and whether any given central bank has actually based its operations on one kind of targeting strategy or another; and the empirical basis for making normative choices among different targets and instruments. The survey concludes by drawing connections to some broader issues, including rules versus discretion and activism versus nonresponsivenless, as well as to the long-standing issue "why money?'

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2668.

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Date of creation: Mar 1991
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Handle: RePEc:nbr:nberwo:2668

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  1. LeRoy, Stephen F & Waud, Roger N, 1977. "Applications of the Kalman Filter in Short-Run Monetary Control," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(1), pages 195-207, February. [Downloadable!] (restricted)
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  21. Poole, William, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, MIT Press, vol. 84(2), pages 197-216, May. [Downloadable!] (restricted)
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  22. Dotsey, Michael & King, Robert G, 1986. "Informational Implications of Interest Rate Rules," American Economic Review, American Economic Association, vol. 76(1), pages 33-42, March. [Downloadable!] (restricted)
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  23. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121. [Downloadable!] (restricted)
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  24. McCallum, Bennett T, 1985. "On Consequences and Criticisms of Monetary Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 570-97, November. [Downloadable!] (restricted)
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  25. McCallum, Bennett T & Hoehn, James G, 1983. "Instrument Choice for Money Stock Control with Contemporaneous and Lagged Reserve Requirements: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 15(1), pages 96-101, February. [Downloadable!] (restricted)
  26. Aizenman, Joshua & Frenkel, Jacob A, 1985. "Optimal Wage Indexation, Foreign Exchange Intervention, and Monetary Policy," American Economic Review, American Economic Association, vol. 75(3), pages 402-23, June. [Downloadable!] (restricted)
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  27. Bean, Charles R, 1983. "Targeting Nominal Income: An Appraisal," Economic Journal, Royal Economic Society, vol. 93(372), pages 806-19, December. [Downloadable!] (restricted)
  28. Benjamin M. Friedman, 1984. "The value of intermediate targets in implementing monetary policy," Proceedings, Federal Reserve Bank of Kansas City, pages 169-199.
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  33. Holbrook, Robert S, 1972. "Optimal Economic Policy and the Problem of Instrument Instability," American Economic Review, American Economic Association, vol. 62(1), pages 57-65, March. [Downloadable!] (restricted)
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