Targets and Instruments of Monetary Policy

The notion of targets and instruments is basic to the conceptual framework that economists have used to bring economic analysis to bear on practical issues of how central banks can and/or should conduct monetary policy. This paper surveys the literature of targets and instruments of monetary policy, focusing primarily on the progression of analytical developments during the past two decades. The two issues that have been most central to this entire line of research are the "instrument problem" -- what price or quantity the central bank should fix directly through its open market operations -- and the "intermediate target problem" -- what role (if any) the central bank should assign to variables that it cannot set directly but over which it can exert substantial influence (the most obvious example, of course, being the money stock). Other issues that have figured prominently in this literature include how best to control money growth, should the central bank choose to do so; the potential role of money, credit, and other financial variables as sources of information that might guide the central bank's operations; the implications of alternative policy frameworks for the information available to the economy's private sector; the positive empirical question of determining 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 normative choices among different targets and instruments. The survey concludes by drawing connections to some broader issues, including rules versus discretion and activism versus nonresponsivenless, as well as to the long-standing issue "why money?'