Targets, Indicators, and Instruments of Monetary Policy
Bennett T. McCallum
It has become increasingly evident that the Federal Reserve's official
strategy of the past decade, involVing the adherence to target paths for
monetary aggregates, is not currently being utilized to any significant extent.
While some commentators welcome and others deplore this development, most would
agree that a need exists for a more explicit and coherent strategy for the
conduct of monetary policy. The present paper seeks to advance the strategic
discussion in several ways. One involves a comparative consideration of
targets for nominal GNP and the price level, with emphasis on specificational
robustness and implications for output variability. A second pertains to
various "indicator" variables recently suggested by Fed officials and others.
In this regard, it is necessary to be clear and specific about the role of
potential indicators. Consequently, a careful review of the relevant
conceptual distinctions--concerning instruments, targets, indicators, etc.--is
reqUired. Finally, the proposal that strategy should be conducted so as to
place minimal reliance on quantity variables is given some attention, in the
context of evidence concerning the merits of an interest rate instrument.
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