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BPEA Article

Improving Monetary Control

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Abstract

IN RECENT YEARS MONETARY POLICY MAKERS have moved far in the
direction of regarding the money stock as their principal instrument. It is a
reasonable shorthand description of this change to say that policy makers
now control the money stock in the light of forecasts of economic activity
and movements in interest rates, whereas before 1970 they controlled interest
rates in the light of forecasts of economic activity and movements in
the money stock. Nonetheless, the "control" actually exercised by the Federal
Reserve is not exact, whether it chooses interest rates or the money
stock as its instrument. Between 1951 and 1970 control of interest rates was
not exact because it was felt desirable to let market forces have a considerable
impact on them. Since 1970 the money stock has not been controlled
exactly because it is deemed desirable to cushion short-run movements in
interest rates by permitting the money stock to fluctuate around a target
path.

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