Monetary vs. Credit Aggregates: An Evaluation of Monetary Policy Targets

During the past decade, monetary aggregates have been used as intermediate targets for monetary policy, with the primary focus of the Federal Reserve on the growth rate of narrow money. However, it has been argued that recent financial innovations have distorted the relationship between M1 and gross...

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Bibliographic Details
Published in:Southern economic journal 1984-01, Vol.50 (3), p.711-723
Main Authors: McMillin, W. Douglas, Fackler, James S.
Format: Article
Language:English
Subjects:
Aggregate
Aggregate income
Aggregates
Bank credit
Bank loans
Credit
Economic models
Employment
Estimates
Federal Reserve monetary policy
Financial liabilities
Fiscal policy
GNP
Gross National Product
Monetary
Monetary aggregates
Monetary policy
Money supply
Statistical analysis
Target
Vector autoregression
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Summary:During the past decade, monetary aggregates have been used as intermediate targets for monetary policy, with the primary focus of the Federal Reserve on the growth rate of narrow money. However, it has been argued that recent financial innovations have distorted the relationship between M1 and gross national product (GNP), and therefore, broader monetary aggregates or credit aggregates might be more appropriate. The vector autoregressive (VAR) model is used to investigate the empirical characteristics of the relationship among: 1. nominal GNP, 2. high-employment expenditures, and 3. various financial aggregates. The financial aggregates included are the standard monetary aggregates (M1, M2, M3, and the liquid asset measure) and a set of credit aggregates (bank credit, the debt proxy, and total nonfinancial liabilities). Of the Fed's current intermediate targets, M1 and total nonfinancial liabilities are subject to feedback from income and therefore may not make good targets. The other aggregates are free of this feedback, but bank credit is the only financial aggregate that has virtually no impact on income.
ISSN:0038-4038
2325-8012
DOI:10.2307/1057986