1. Conduct of Monetary Policy: Goals and Targets
Chapter 18
Conduct of Monetary Policy: Goals and Targets

2. Goals of Monetary Policy
1. Price Stability
2. Economic Growth
3. Low Unemployment
4. Interest Rate Stability
5. Financial Markets Stability
6. Exchange Rate Stability
Goals are often in conflict!
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3. Central Bank Strategy
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4. Money Supply Target 1. MD fluctuates between MD' and M D''
2. With M-target at M*, i fluctuates between i' and i''
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5. Interest Rate Target 1. MD fluctuates between MD' and MD''
2. To set i-target at i* MS fluctuates between M' and M''
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6. Criteria for Choosing Targets
Criteria for Intermediate Targets
1. Measurability
2. Controllability
3. Predictability
Interest rates aren’t clearly better than Ms on criteria 1 and 2 because hard to measure and control real interest rates.
Criteria for Operating Targets
Same criteria as above
Reserve aggregates and interest rates about equal on criteria 1 and 2. For 3, if intermediate target is Ms, then reserve aggregate is better.
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7. Taylor Rule
Taylor Rule for choosing a target for the federal funds rate:
Fed funds rate target = inflation rate +
“equilibrium” real fed funds rate +
1/2 (inflation gap) +
1/2 (output gap)
Inflation gap = current inflation - target inflation
Output gap = percentage deviation of real GDP from potential full-employment GDP
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8. Taylor Rule and Fed Funds Rate
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