Targets, Indicators, and Instruments of Monetary Policy

It has become increasingly evident that the Federal Reserve's official strategy of the past decade, involving the adherence to target paths for monetary aggregates, is not currently being utilized to any significant extent. While some commentators welcome and others deplore this development, most would agree that a need exists for a more explicit and coherent strategy for the conduct of monetary policy. The present paper seeks to advance the strategic discussion in several ways. One involves a comparative consideration of targets for nominal GNP and the price level, with emphasis on specificational robustness and implications for output variability. A second pertains to various "indicator" variables recently suggested by Fed officials and others. In this regard, it is necessary to be clear and specific about the role of potential indicators. Consequently, a careful review of the relevant conceptual distinctions--concerning instruments, targets, indicators, etc.--is reqUired. Finally, the proposal that strategy should be conducted so as to place minimal reliance on quantity variables is given some attention, in the context of evidence concerning the merits of an interest rate instrument.