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The Credibility of the Federal Reserve's Monetary Targets

  • J. Peter Ferderer

    (The Jerome Levy Economics Institute)

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.

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File URL: http://econwpa.repec.org/eps/mac/papers/9903/9903006.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 9903006.

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Length: 43 pages
Date of creation: 09 Mar 1999
Date of revision:
Handle: RePEc:wpa:wuwpma:9903006
Note: Type of Document - Acrobat PDF; prepared on IBM PC; to print on PostScript; pages: 43; figures: included
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Thomas J. Sargent, 1981. "The ends of four big inflations," Working Papers 158, Federal Reserve Bank of Minneapolis.
  2. Olivier J. Blanchard, 1984. "The Lucas Critique and the Volcker Deflation," NBER Working Papers 1326, National Bureau of Economic Research, Inc.
  3. Ann-Marie Meulendyke, 1988. "A review of Federal Reserve policy targets and operating guides in recent decades," Quarterly Review, Federal Reserve Bank of New York, issue Aut, pages 6-17.
  4. Walsh, Carl E, 1986. "In Defense of Base Drift," American Economic Review, American Economic Association, vol. 76(4), pages 692-700, September.
  5. Frankel, Jeffrey A & Hardouvelis, Gikas A, 1985. "Commodity Prices, Money Surprises and Fed Credibility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 425-38, November.
  6. Ben Bernanke & Frederic Mishkin, 1992. "Central Bank Behavior and the Strategy of Monetary Policy: Observations From Six Industrialized Countries," NBER Working Papers 4082, National Bureau of Economic Research, Inc.
  7. Baxter, Marianne, 1985. "The role of expectations in stabilization policy," Journal of Monetary Economics, Elsevier, vol. 15(3), pages 343-362, May.
  8. Blackburn, Keith & Christensen, Michael, 1989. "Monetary Policy and Policy Credibility: Theories and Evidence," Journal of Economic Literature, American Economic Association, vol. 27(1), pages 1-45, March.
  9. Peter N. Ireland, 1993. "Price stability under long-run monetary targeting," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 25-46.
  10. Kenneth Rogoff, 1986. "Reputational Constraints on Monetary Policy," NBER Working Papers 1986, National Bureau of Economic Research, Inc.
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