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Monetary Aggregates as Targets: Some Theoretical Aspects

  • Charles Freedman

In the mid-1970s the Bank of Canada, along with a number of other central banks, began to set explicit targets for monetary growth and to emphasize the long-run role of monetary aggregates in controlling the rapid upward trend of prices. There are three distinct ways of viewing and interpreting a policy of setting growth targets for monetary aggregates. The first is associated with the work of William Poole, the second is derived from the reduced-form model initially developed at the Federal Reserve Bank of St. Louis, and the third, which the author has labeled the feedback- rule approach, is related to the techniques developed within central banks to implement the policy of monetary targeting. In this paper the author sets forth the logic and examines the implications of these three methods when the principal aim of policy is reducing the rate of inflation. He also examines the question of gradualist versus "cold-shower" policies and the criteria for selecting a monetary aggregate as a policy target.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0775.

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Date of creation: Sep 1981
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Publication status: published as Freedman, Charles. "Monetary Aggregates as Targets: Some Theorectical Aspects." Bank of Canada Technical Report 27, (1981).
Handle: RePEc:nbr:nberwo:0775
Note: ME
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  1. Milton Friedman, 1959. "The Demand for Money: Some Theoretical and Empirical Results," NBER Chapters, in: The Demand for Money: Some Theoretical and Empirical Results, pages 1-29 National Bureau of Economic Research, Inc.
  2. Meyer, Laurence H, 1974. "Lagged Adjustment in Simple Macro Models," Oxford Economic Papers, Oxford University Press, vol. 26(3), pages 334-49, November.
  3. William Poole, 1970. "Gradualism: A Mid-Course View," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 1(2), pages 271-302.
  4. 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.
  5. J. F. Dingle & G. R. Sparks & M. A. Walker, 1972. "Monetary Policy and the Adjustment of Chartered Bank Assets," Canadian Journal of Economics, Canadian Economics Association, vol. 5(4), pages 494-514, November.
  6. Leonall C. Andersen & Jerry L. Jordon, 1968. "Monetary and fiscal actions: a test of their relative importance in economic stabilization," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 11-23.
  7. Sargent, Thomas J, 1971. "A Note on the 'Accelerationist' Controversy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 3(3), pages 721-25, August.
  8. William Fellner, 1979. "The Credibility Effect and Rational Expectations: Implications of the Gramlich Study," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 10(1), pages 167-190.
  9. Henderson, Dale W, 1979. "Financial Policies in Open Economies," American Economic Review, American Economic Association, vol. 69(2), pages 232-39, May.
  10. W. R. White, 1979. "Alternative Monetary Targets and Control Instruments in Canada: Criteria for Choice," Canadian Journal of Economics, Canadian Economics Association, vol. 12(4), pages 590-604, November.
  11. Haas, Richard D & Alexander, William E, 1979. "A Model of Exchange Rates and Capital Flows: The Canadian Floating Rate Experience," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(4), pages 467-82, November.
  12. Benjamin M. Friedman, 1977. "The Inefficiency of Short-Run Monetary Targets for Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(2), pages 293-346.
  13. Pierre Fortin, 1979. "Monetary Targets and Monetary Policy in Canada: A Critical Assessment," Canadian Journal of Economics, Canadian Economics Association, vol. 12(4), pages 625-46, November.
  14. James Tobin, 1974. "Monetary Policy in 1974 and Beyond," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 5(1), pages 219-232.
  15. Boyer, Russell S, 1978. "Optimal Foreign Exchange Market Intervention," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1045-55, December.
  16. William Poole, 1970. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Staff Studies 57, Board of Governors of the Federal Reserve System (U.S.).
  17. Stephen F. LeRoy & David E. Lindsey, 1978. "Determining the monetary instrument: a diagrammatic exposition," Special Studies Papers 103, Board of Governors of the Federal Reserve System (U.S.).
  18. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  19. James Tobin, 1980. "Stabilization Policy Ten Years After," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 11(1, Tenth ), pages 19-90.
  20. Friedman, Benjamin M., 1979. "Optimal expectations and the extreme information assumptions of `rational expectations' macromodels," Journal of Monetary Economics, Elsevier, vol. 5(1), pages 23-41, January.
  21. Kareken, John H & Muench, Thomas & Wallace, Neil, 1973. "Optimal Open Market Strategy: The Use of Information Variables," American Economic Review, American Economic Association, vol. 63(1), pages 156-72, March.
  22. Charles Freedman, 1981. "Some Theoretical Aspects of Base Control," NBER Working Papers 0650, National Bureau of Economic Research, Inc.
  23. William R. White & Stephen S. Poloz, 1980. "Monetary Policy and Chartered Bank Demand Functions for Excess Cash Reserves," Canadian Journal of Economics, Canadian Economics Association, vol. 13(2), pages 189-205, May.
  24. Laurence H. Meyer & Robert H. Rasche, 1980. "On the costs and benefits of anti-inflation policies," Review, Federal Reserve Bank of St. Louis, issue Feb, pages 3-14.
  25. William Poole, 2008. "Rules-of-thumb for guiding monetary policy," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 447-498.
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