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Intermediate Target Approach

Intermediate Target Approach - Rationale If the shocks to...

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Intermediate Target Approach One operating strategy focuses directly on the goals. Policymakers who follow a direct, single- stage strategy closely monitor the goal variable and manipulate the instrument only if the current and desired values of the goal variable differ. The other strategy is an intermediate target approach. Here, the goal variable is ignored in the short run. There is some other variable that for short-run purposes is treated as if it were the goal. characteristics of the intermediate target: readily observable and measurable responds to policy instruments before the goal variable storng and predictable link between intermediate and goal variables Given the goals and given the policymaker's best estimate of the structure of the economy, lags, and possible shocks, the optimal value of the intermediate target is selected. The policymaker then focuses on this variable and adjusts the instruments to h it the optimal value. The Federal Reserve follows an intermediate target strategy.
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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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Intermediate Target Approach - Rationale If the shocks to...

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