Abstract

Money Supply Management with a Stochastic Money Supply Target

Two salient features are characteristic of US monetary policy in the last ten years. After some years of money supply management attempted via short-term interest rate targets, the Federal Reserve Board switched to a management regime in October 1979 focusing on the short-term control of unutilized reserves. In October 1982 a new regime was adopted in which orientational targets have so far played a greater role for the refinancing of loan positions. In the monetary policy discussion on the current regime two different forms of interpretation have emerged. Some authors understand the current regime as the return to short-term interest rate targets, whilst others equate the importance of targets for the refinancing of loan positions with that of previous targets for unutilized reserves. However, both interpretations are unsatisfactory insofar as they are bound to suppose a priori that the Fed has chosen a suboptimal procedure for managing interest rates or money supply. This contribution develops an alternative interpretation avoiding this weakness. The starting point is the observation that the Fed faces a lack of information in the management of money supply via unutilized reserves that has generally been ignored in the presentation of this regime: for institutional reasons the holdings of unutilized reserves currently escape observation. Making optimal use of the information available to the Fed leads to a control regime aiming, as before, at short-term targets for unutilized reserves, which may become a sub-optimal procedure in money supply management via short-term interest rate or refinancing targets.