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Unformatted text preview: Rationale If the shocks to the economy have the same impact on the intermediate variable as on the goal and if the policy tools as well as the shocks influence the intermediate variable before they influence the goal, then a readily observable intermediate target will signal the behavior of the goal variable and indicate how policy should be adjusted. What is the Best Intermediate Target? The most frequently used targets are monetary aggregates such as M1 and M2 and short-term interest rates such as the federal funds rate. The Federal Reserve cannot target both the money supply and the federal funds rate simultaneously. The choice depends on the source of economic fluctuations: when variations in the demand for goods and services are the major economic disturbance, a money target is preferable when variations in the demand for assets and money are the major economic disturbances, an interest rate target produces smaller fluctuations in income...
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This note was uploaded on 11/22/2011 for the course FIN FIN1100 taught by Professor Bradrifkin during the Fall '09 term at Broward College.
- Fall '09
- Personal Finance