Commodity prices, the term structure of interest rates, and exchange rates: useful indicators for monetary policy?

Effective conduct of monetary policy requires accurate and timely indications of the current and future course of the ultimate targets of monetary policy. It is widely agreed that the monetary aggregates no longer provide reliable signals of inflation or of real activity. It is less widely agreed which variable or variables should replace the aggregates, or how they would be used in conducting monetary policy. This article considers whether the slope of the term structure of interest rates, commodity prices, and the exchange rate could be suitable replacements for the aggregates. The author finds that on both theoretical and empirical grounds, the proposed indicators would be neither straightforward nor reliable guides to monetary policy. On theoretical grounds, the indicators would be difficult to interpret because the sign and magnitude of their correlations with ultimate targets depend critically upon the monetary policy regime in effect. Empirically, the study finds that no single indicator bears a stable and statistically reliable relationship to the current or future course of a monetary policy target.