Foreign Experiences With Monetary Targeting: A Practitioner'S Perspective

Under certain conditions, monetary targets can reduce information costs and transaction costs to market participants. In international financial markets, these costs are associated with several types of risk which can influence the extent of international financial intermediation. During the 1970s, several factors seem to have prompted the trend toward targeting. The search by central banks for improved methods of inflation control was the primary factor. Targeting took a number of forms with respect to time periods, growth rates, and aggregates employed. In general, the experience with foreign monetary targeting to date probably has not lowered information costs or transactions costs to market participants, due to the extensive shifting between targets, changing of targeting time periods, and continual base drift. Such changes in targeting procedures along with the failure to hit targets tend to mask whether a change in monetary growth is temporary or permanent. The desire of foreign central banks to implicitly target exchange rates influences their ability to achieve monetary targets. The extent of this influence depends on the ability of foreign central banks to sterilize exchange market intervention.