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The Credibility of the Federal Reserve's Monetary Targets

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  • J. Peter Ferderer

    (The Jerome Levy Economics Institute)

Abstract

In the 1970s the Federal Reserve began a policy of targeting monetary growth. Those who viewed this as a positive development felt that such a policy would allow the Fed to signal its intentions to be firm in its pursuit of an antiinflationary agenda. Moreover, if the Fed could pursue its agenda in a credible manner, the social costs of undertaking such a policy could, presumably, be reduced. In addition, credible monetary growth targets cause the money supply to follow a mean-reverting process. If the money supply and the aggregate price level are strongly related, monetary targets cause the aggregate price level to be mean reverting as well, thereby reducing long-run uncertainty about prices, raising allocative efficiency in capital markets, and increasing economic growth. In this working paper, J. Peter Ferderer explores the history of monetary targeting since the 1970s to determine the extent to which Fed actions have been seen as credible at reducing inflation, and the factors affecting credibility.

Suggested Citation

  • J. Peter Ferderer, 1999. "The Credibility of the Federal Reserve's Monetary Targets," Macroeconomics 9903006, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpma:9903006
    Note: Type of Document - Acrobat PDF; prepared on IBM PC; to print on PostScript; pages: 43; figures: included
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    References listed on IDEAS

    as
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