Targets and Techniques of Monetary Policy in Western Europe

Abstract

In recent years a growing number of western European countries have adopted the practice of setting growth targets for the money supply and/or other monetary aggregates. For these countries, of course, the new approach has implied a shift away from reliance upon interest rate objectives as an intermediate target of policy. What is the story lying behind the spreading use of this technique? Have central banks suddenly become converted to the precepts of “monetarism”? Or is it a case of reverse causation — a pragmatic response to the changing economic environment, or what Milton Friedman recently alluded to as the doctrinal influence of “brute experience”?

Reprinted with permission from the Banca Nationale del Lavoro Quarterly Review, No. 124, March 1978. The author is very grateful for helpful comments and assistance from colleagues at the Bank for International Settlements, in particular from W. H. Bruce Brittain.