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Selecting an intermediate target variable for monetary policy when the goal is price stability

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  • Michael T. Belongia

Abstract

Conventional investigations of the \"best\" intermediate target variable for monetary policy have used a single criterion: the best fit between the behavior of an aggregate and that of some goal variable such as nominal spending or the aggregate price level. Ignored in this type of study, however, is the ability of the central bank to control the behavior of the aggregate which has the best fit relative to the goal variable. This paper treats the issue of monetary control explicitly and selects an intermediate target variable on the basis of a joint criterion of monetary control and relationship with the aggregate price level. The results indicate that all of the traditional simple sum aggregates perform poorly relative to Divisia aggregates or the currency-equivalent (CE) measure recently proposed by Rotemberg, et al.

Suggested Citation

  • Michael T. Belongia, 1992. "Selecting an intermediate target variable for monetary policy when the goal is price stability," Working Papers 1992-008, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:1992-008
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    References listed on IDEAS

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    1. There is nothing “unconventional” about money base control
      by Lars Christensen in The Market Monetarist on 2013-11-30 15:06:27

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    1. Tang, Maggie May-Jean & Puah, Chin-Hong & Awang Marikan, Dayang-Affizzah, 2013. "Empirical Evidence on the Long-Run Neutrality Hypothesis Using Divisia Money," MPRA Paper 50020, University Library of Munich, Germany.
    2. Thornton, Saranna Robinson, 2000. "How do broader monetary aggregates and divisia measures of money perform in McCallum's adaptive monetary rule?," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 181-204.

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    Keywords

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