Monetary Aggregate Targets and the Volatility of Interest Rates: Taxonomic Discussion

IN FORMULATING AND IMPLEMENTING monetary policy in recent years, the Federal Reserve (Fed) has placed increased emphasis on the specification and achievement of growth rates for selected monetary aggregates. Within this longer-run (six to twelve months) strategy, however, the Fed has been willing to tolerate monetary growth that deviated significantly from the long-run target paths. Three reasons appear to have been responsible for this strategy. First, short-run deviations of monetary growth have not been expected to jeopardize the ultimate achievement of the longer-run target the presumption being that misses in the initial months of a target period can be made up (i.e., offset) in the remaining months of the period. Second, it has been thought that, within certain limits, short-run deviations of monetary growth from longer-run smooth growth paths have essentially trivial implications for the course of economic events, and therefore do not significantly impair the achievement of longer-run inflation and employment objectives.l