Targets for Monetary Policy in the Coming Year

Franco Modigliani and

FM

Franco Modigliani

Lucas Papademos

LP

Lucas Papademos Massachusetts Institute of Technology

MOST OBSERVERS would agree that the present state of the economy can be traced largely to the monetary policy pursued during the last few quarters, in particular the severe monetary squeeze of mid-1974. We see this policy as resulting from the pursuit of inappropriate targets framed in terms of monetary aggregates and “orderly markets”—since we disbelieve that policymakers intended to achieve 9 percent unemployment, so far off any target announced by the administration or sanctioned, even indirectly, by Congress. In order to avoid similar episodes in the coming difficult quarters, monetary policy should be aimed at explicitly stated targets for real output and employment, and at consistent targets for money income. The purpose of this paper is to propose appropriate real targets for the next two years and to examine their implications for monetary policy.