Intermediate Targets and Indicators for Monetary Policy: A Critical Survey.

• Author: Hegji, Charles E.

This volume contains a series of studies by members of the staff of the Federal Reserve Bank of New York. Its purpose is to evaluate the usefulness of alternative monetary policy operating procedures, particularly in the light of the breakdown of the relationship between M1 and income that occurred during the 1980s, and the Fed's subsequent abandonment of the use of M1 as a policy target. The volume is encyclopedic in its coverage and clearly the best study I have read to date concerning Federal Reserve operating procedures. It is a little esoteric at times, but for the most part it is accessible to non-policy-making economists. It is certainly a must reading for Federal Reserve watchers.

The volume consists of an introduction by Richard Davis, and eleven studies concerning the desirability of using alternative macroeconomic variables as monetary policy operating guides. Given this introduction, the volume is set up so that each essay can be read by itself without loss of continuity.

Davis does a good job of introducing the non-initiated to the jargon of the targets and indicators of monetary policy. He clearly explains the differences between instruments, under direct control of the Federal Reserve, intermediate targets or operating guides to policy, and information variables, that is, policy indicators. Policy indicators are further divided into those that provide information to the Federal Reserve during the conduct of monetary policy, and indicators that the public can watch to determine the current stance of monetary policy.

I found particularly useful the explanation Davis provides for the use of an intermediate target, based on recent theoretical developments. The policy literature has clearly established the inefficiency of using intermediate targets as policy guides, given money and other financial variables can be used as information variables. However, money may still be useful as a policy target to provide a nominal anchor to policy and prevent time-inconsistent inflationary policies. Moreover, the use of money as an intermediate target potentially enhances Federal Reserve credibility.

The first four essays consist of a series of studies on the usefulness of monetary aggregates as intermediate targets or information variables. The monetary base, broad and narrow monetary aggregates, liquidity, and credit are the subject of study. The studies include theoretical discussion, review of past literature, updating empirical work to...