Financial Innovation and Monetary Aggregate Targeting

Abstract

Monetary policy is used by the monetary authorities to achieve certain macro economic goals, usually summarized as GNP and the rate of inflation. The influence of monetary policy on these ultimate goals of economic policy is not direct, but indirect, working through what are usually called intermediate targets. Neither the final goals of monetary policy, nor the intermediate targets are under the complete control of the central bank. Therefore, the structure of the intermediate target strategy suggests three important criteria for choosing a suitable target. First, and most obviously, the intermediate target must be sufficiently closely and stably linked to the final goals of policy so that a policy which makes the intermediate target reach certain levels will also mean that the ultimate targets reach certain associated levels. The second criterion concerns the controllability of the intermediate target. The problem of controlling the intermediate target gives rise to an operational target. In this respect it is important to distinguish between these two targets. The operating target plays an important role in the day-to-day conduct of monetary policy. This variable is closely associated with the instruments of monetary policy. By altering the policy instruments, the central bank has significant influence on the operational target, which in turn must be closely linked to the intermediate target. The final criterion for the choice of an intermediate target concerns the quality of measurement of this variable.

The present paper reflects the opinions of the author and does not purport to represent those of the institute (Netherlands Central Bureau of Statistics) of which he is an official.