Chapter 22 Targets and instruments of monetary policy

This chapter discusses the major conceptual developments in the literature of targets and instruments of money policy, with particular emphasis on the broader strategic issues defining the overall framework within which policy operates. The instrument problem of the selection of specific price or quantity that the central bank directly and immediately controls is examined in the chapter. It is a fact that what most people mean by money in discussions of monetary policy is not a plausible policy instrument at all, because it is endogenous in the kind of fractional reserve banking system common to most modern market economies. Hence, money is at best an intermediate target of monetary policy. The chapter discusses the implications of alternative monetary policy frameworks for the information available to the economy's private sector, the positive empirical question of when and whether any given central bank has actually based its operations on one kind of targeting strategy or another, and the empirical basis for making the normative selections of monetary policy targets and instruments.