The Value of Intermediate Targets in Implementing Monetary Policy

Despite the growing experience with their use, both in the United States and abroad, the role of intermediate targets of monetary policy remains a source of confusion and controversy. Although some advocates apparently regard stable growth of one or another monetary aggregate as an end in itself, by far the more typical view in favor of such intermediate targets is that they somehow enable the central bank to achieve more effectively its objectives for the nonfinancial economy, usually including price stability or real growth, or both. It is in making that 'somehow more precise, and thereby making the appropriate role (if any) of intermediate targets operational, that the difficulty lies. The ambiguity stems from the fact that measures like money or credit are not under the immediate control of the central bank. In the United States, the deposits that constitute the main bulk of any of the familiar monetary aggregates are created by more than 40,000 financial institutions, and how much money there is at any time depends on the decisions not only of these institutions but of millions of individuals and businesses that own deposits. Broader asset aggregates like total liquid assets depend on the decisions of an even wider range of institutions, as do liability aggregates like domestic nonfiancial credit. The Federal Reserve System can influence any of these measures, to be sure, but it cannot directly control them in the sense that it can control, for example, the nonborrowed