The Political Uses of Monetary Targets

Abstract

In monetary policy, probably no issue has dominated the field of discussion like the issue of the use of monetary aggregates in the conduct of policy. Debates about announcing explicit targets for monetary aggregates have been so long and intense that entire forests have been consumed in the printing; large libraries could be devoted to that topic alone; platoons of graduate students have been conscripted for endless replications and nitpicking refutations. Yet, despite all this, despite the monographs, edited collections, articles, notes and communications devoted to the topic, one issue remains for the most part unexplored: the link between political strategies and explicit monetary aggregate targeting. Many economists have been disappointed by the way countries have defined their targets and/or the way policy has been implemented. It has often seemed that governments selected targets with insufficient justification and that the basic process of policy implementation was unchanged following the emphasis on targeting. Have policymakers tried to fool someone, or have they been confused themselves? In this analysis I propose that the answers to these puzzles lie in the fact that monetary targets have been used to perform political functions at least as much as economic ones.