The ”New Era” of Controlling Monetary Aggregates

Abstract

The “New Era” of Control of Monetary Aggregates

The report, itself an abridged version of a longer paper, gives a survey of common features and major problems of the new strategies practised since about 1975 by the Swiss National Bank (SNB), the West German Bundesbank and the Federal Reserve Board (Fed). 1. The fundamentals of the “new era”, dubbed an “experiment” by the central banks, have their roots in basic monetarist recommendations: prior public announcement of monetary growth objectives, transition to broader monetary aggregates, stabilizing intention as an explicit reason, a certain shift of responsibility for inflationary price boosts from the central bank to the other groups involved in economic policy-making. 2. For the setting of monetary growth objectives (“intermediate objectives’’), the central banks have chosen different aggregates: the Bundesbank a construct of the quantity of central bank money (“CBM’”), the SNB the aggregate M₁, and the Fed the aggregate M _1,2,3(annually) and M _1,2(two-monthly). Above all, the “free liquidity reserves of the banks (FLR)” [Bundesbank], the “adjusted monetary base (B^a)” [SNB] and various reserve aggregates [Fed] serve as control variables and hence simultaneously as indicators of monetary policy. 3. The technique of controlling the quantity of money is based on discretionary changes in the liquidity and reserve aggregates, which trigger stimuli to adjust interest rates and adaption constraints that influence the growth of monetary aggregates (“indirect control mechanism”). Uncertainties in calculations (dosage and timing of control variables, time lags) render control policy more difficult, as do fluctuating multipliers and velocities of circulation of money (dv). 4. The chief problems of the new Bundesbank policy were extreme fluctuations of FLR multipliers, the arbitrary composition of CBM and the inclusion of v_CBM in the calculation of the CBM growth objective. Marked fluctuations of the B^a multiplier have made the control policy of the SNB considerably more difficult and make a change to broader reserve and money quantity aggregates seem advisable. The lack of co-ordination of money quan tity objectives with the government and the non-publication of the components of the monetary growth rate are grave deficiencies of the new Fed strategy. The simultaneous setting of several objective values with broad bandwidths and the changing basis in laying down long-term money quantity objectives make assessment of the success of the Fed strategy difficult and aggravate the problem of consistency between interest-rate and money quantity objectives.