A price target for U.S. monetary policy? Lessons from the experience with money growth targets

The cutting edge of recent efforts to reshape monetary policy in many countries has been to impose a price target on the central bank. This paper examines such a policy in light of the Federal Reserve System's experience with money targeting from the late 1970s through the mid 1980s. The empirical analysis documents the Federal Reserve's initial use and subsequent disregard of money growth targets, and shows that abandoning these targets was a sensible response to the changing mix of shocks affecting the U.S. economy -- specifically, an increase in the relative volatility of money demand shocks. This experience provides little ground for confidence that a price target would be optimal for U.S. monetary policy. Even if the structure of the relevant shocks at any particular time were to appear favorable, a policy based on a price target would likewise be undermined if the relative volatility of aggregate supply shocks increased.