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The formulation of monetary policy

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  • Robert L. Hetzel

Abstract

The purpose of this paper is to elucidate the way in which current institutional arrangements shape the character of monetary policy. It is emphasized that the Fed, in order to preserve its independence, formulates monetary policy in a way that prevents the formation of coalitions within the government that could threaten its independence. As a consequence, the Fed, in general, attempts to balance multiple, changing objectives. This attempt leads to the demand for \"flexibility,\" an absence of precommitment. Much of the paper is devoted to a discussion of the way in which the Fed's desire to avoid precommitment influences its use of analytical procedures for formulating policy and its use of money supply targets.

Suggested Citation

  • Robert L. Hetzel, 1984. "The formulation of monetary policy," Working Paper 84-02, Federal Reserve Bank of Richmond.
    • Handle: RePEc:fip:fedrwp:84-02
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    References listed on IDEAS

    as
    1. Mayer, Thomas, 1982. "A case study of Federal Reserve policymaking : Regulation Q in 1966," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 259-271.
    2. Jack M. Guttentag, 1966. "The Strategy of Open Market Operations," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 80(1), pages 1-30.
    3. Lombra, Raymond & Moran, Michael, 1980. "Policy advice and policymaking at the federal reserve," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 13(1), pages 9-68, January.
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    Cited by:

    1. Robert J. Barro, 1984. "Rules versus Discretion," NBER Working Papers 1473, National Bureau of Economic Research, Inc.
    2. Robert L. Hetzel, 1984. "Monetary policy in the early 1980's," Working Paper 84-01, Federal Reserve Bank of Richmond.
    3. Michael Dotsey, 1985. "Monetary policy, secrecy, and federal funds rate behavior," Working Paper 85-04, Federal Reserve Bank of Richmond.

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