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Comments on Sumner paper
lames L.
Pierce Universityof Ccdifomid, Berkeley
The paper by M.T. Sumner provides a valuable survey of the operatiorP of monetary
in various Countries. Ad:lerence to these targets and the seriousness with which they are taken has clearly differed from country to country. The United States must be judged to be low on the list of serious anjl( successful adherents to monetary targets. Virtually all central banks, however, have shown a distaste for being pinned down to quantitative targets, There appear to be two differp,nt reasons for this behavior. First, central bankers are accustomed to working in secret with policy actions conducted with a minimum of “fuss.” The historic.;1 tendency for GX,;~ bankers to operate with stealth is strongly ingrained. Economic deielopments of the past decade have forced central bankers to take more visible postures, but many of them do not like the consequences. As a result, there has been a tendency for some central banks to prefer form over substance in the use of monetary targets. The behavior of the Federal Reserve is illustrative. Several monetary targets are announced, with wide ranges of tolerance for each, and then the Fed proceeds to feel free to miss any or all of the targets. The second reason that central banks have shown less inclination to adhere to monetary targets than their critics would like may stem from a belief that it is inefficient to use intermediate targets for policy. A significant literature has been produced in recent years showing that intermediate targets for policy are a cumbersome fifth wheel. This literature had its genesis in the pioneering tW#S
work of Brunner and Meltzer (see Brunner, 1969), but the problem was effectively formalized by Kareken, Muench, and Wal:ace (1973). It can be shown that in a world of uncertainty, which is obviously the condition of the real world, a central bank should conduct policy by varying the xue instruments at its disposal. Thus, policy strategies should be conducted using instruments, such as bank reserves or the monetary base, that the central bank can truly control. These instruments should be set to achieve the desired path of the ultimaCe objectives of policy, such as the rate of inflation and the growth of outPut. The behavior of so-called s, such as the money stock, w e used ad ~~~o~rnat~o~variables to ai endogenous to the syste erforming in a mannpr consistent with the dete~~~~n~ whethe ese variables and other factors iadicate P tial monetary policy strate to er pcctabions, the path of policy iny is not e objective struments should be
of achie,ving goals for inffation and output, not with the objective of achieving some pred~eterminncd. growth path for the monetary aggregate!;. The actual growth parh of these aggregates will be determined endogenously through the iateracti,on of policy instruments and the economy itself. Such interaction may or may not result in smooth growth of the monetary aggregates. The results of this analysis suggest that monetary policy should not be constrained by arbitrary pmwth targets for the monetary aggregates or even for .h= true instruments of policy. Other research indicates that if the uncertainty about the speed and matyait:‘ude of effect of monetary policy is sufficiently great, a “noninterventionist ” policy should be pursued. Milton Friedman ( 1969) initially proposed a constant growth in the money stock on the basis of ths assertion that the lags in effecl sf monetary policy are sufticiently long and variable that an active attempt to stabilize the economy can be destabilizing. The ccnrWons under which this proposal is superior to an act&e policy have been specifit? in a recent paper by Craine ( 1979). The growing literature on policymaking uncle) uncertainty has provided a rationale for policies that produce gradual or ever zero variations in instruments about some predetermined path. If uncertainty ab3u.t the effect of policy is sufficiently great, “information variables” provide no information and policy strategies should not be modified in response to incomng data and forecasts. It is important to point out, however, that the:.e results apply to growth paths for the true policy instruments, such as the monetary base, and not to the endogenously determined money stock. If uncertainty is sufficiently large, then predetermined growth targets for reserves or the monetary base are appropriate. There is no theoretical rationale fi>r growth targets for money. If a rationale exists, it must be polLi or a matter of public relations not economics. The literature on rational expectations questions t,le meaningfulness of a ‘ly systematic policy. According to this approach, agents in the economy only require knov&edge of the central bank’s “reaction function.” There is no superiority of a constant policy over a variable policy as long as the policy can be predicted. Perhaps a constant policy is more predictable or more believable. It is disappointing that Sumner did not address these iti;.4eF more thozoughly in his paper, because they are central to understaudinE: t.he role of monetary targets and to deciphering central bank behavior under theF,e tary:ts.
References Brunner, K. (ed.) (1969) Targets and kdicators of Monetary Policy. San Francisco: Chandler. Craine, R. (1979)
Optimal Monetary Policy with Uncertainty. nomic Dynamics and Cop2trol, 1: 5 9-33.
Journ& of Eco-
Friedman, M. and Heller, W. (1969) Monefav vs. Fiscal Policy. New Yoi,k, N.Y.: The Graduate School of Business Administration, New York University. Kareken, J., Muench, T., and Walla.ce, N. (1973) Optimal Open Market Strategy: The Use of Information Variables. American Economic Review, 63: 156-72. Sumner, M.T. (1980)
The Operation of Monetary Targets. Carnegie-Rochester Conference Series on Public Policy, 13. K. brunner and A.H. Meltzer, eds. Amsterdam: North-Holland.
133
Pierce Universityof Ccdifomid, Berkeley
The paper by M.T. Sumner provides a valuable survey of the operatiorP of monetary
in various Countries. Ad:lerence to these targets and the seriousness with which they are taken has clearly differed from country to country. The United States must be judged to be low on the list of serious anjl( successful adherents to monetary targets. Virtually all central banks, however, have shown a distaste for being pinned down to quantitative targets, There appear to be two differp,nt reasons for this behavior. First, central bankers are accustomed to working in secret with policy actions conducted with a minimum of “fuss.” The historic.;1 tendency for GX,;~ bankers to operate with stealth is strongly ingrained. Economic deielopments of the past decade have forced central bankers to take more visible postures, but many of them do not like the consequences. As a result, there has been a tendency for some central banks to prefer form over substance in the use of monetary targets. The behavior of the Federal Reserve is illustrative. Several monetary targets are announced, with wide ranges of tolerance for each, and then the Fed proceeds to feel free to miss any or all of the targets. The second reason that central banks have shown less inclination to adhere to monetary targets than their critics would like may stem from a belief that it is inefficient to use intermediate targets for policy. A significant literature has been produced in recent years showing that intermediate targets for policy are a cumbersome fifth wheel. This literature had its genesis in the pioneering tW#S
work of Brunner and Meltzer (see Brunner, 1969), but the problem was effectively formalized by Kareken, Muench, and Wal:ace (1973). It can be shown that in a world of uncertainty, which is obviously the condition of the real world, a central bank should conduct policy by varying the xue instruments at its disposal. Thus, policy strategies should be conducted using instruments, such as bank reserves or the monetary base, that the central bank can truly control. These instruments should be set to achieve the desired path of the ultimaCe objectives of policy, such as the rate of inflation and the growth of outPut. The behavior of so-called s, such as the money stock, w e used ad ~~~o~rnat~o~variables to ai endogenous to the syste erforming in a mannpr consistent with the dete~~~~n~ whethe ese variables and other factors iadicate P tial monetary policy strate to er pcctabions, the path of policy iny is not e objective struments should be
of achie,ving goals for inffation and output, not with the objective of achieving some pred~eterminncd. growth path for the monetary aggregate!;. The actual growth parh of these aggregates will be determined endogenously through the iateracti,on of policy instruments and the economy itself. Such interaction may or may not result in smooth growth of the monetary aggregates. The results of this analysis suggest that monetary policy should not be constrained by arbitrary pmwth targets for the monetary aggregates or even for .h= true instruments of policy. Other research indicates that if the uncertainty about the speed and matyait:‘ude of effect of monetary policy is sufficiently great, a “noninterventionist ” policy should be pursued. Milton Friedman ( 1969) initially proposed a constant growth in the money stock on the basis of ths assertion that the lags in effecl sf monetary policy are sufticiently long and variable that an active attempt to stabilize the economy can be destabilizing. The ccnrWons under which this proposal is superior to an act&e policy have been specifit? in a recent paper by Craine ( 1979). The growing literature on policymaking uncle) uncertainty has provided a rationale for policies that produce gradual or ever zero variations in instruments about some predetermined path. If uncertainty ab3u.t the effect of policy is sufficiently great, “information variables” provide no information and policy strategies should not be modified in response to incomng data and forecasts. It is important to point out, however, that the:.e results apply to growth paths for the true policy instruments, such as the monetary base, and not to the endogenously determined money stock. If uncertainty is sufficiently large, then predetermined growth targets for reserves or the monetary base are appropriate. There is no theoretical rationale fi>r growth targets for money. If a rationale exists, it must be polLi or a matter of public relations not economics. The literature on rational expectations questions t,le meaningfulness of a ‘ly systematic policy. According to this approach, agents in the economy only require knov&edge of the central bank’s “reaction function.” There is no superiority of a constant policy over a variable policy as long as the policy can be predicted. Perhaps a constant policy is more predictable or more believable. It is disappointing that Sumner did not address these iti;.4eF more thozoughly in his paper, because they are central to understaudinE: t.he role of monetary targets and to deciphering central bank behavior under theF,e tary:ts.
References Brunner, K. (ed.) (1969) Targets and kdicators of Monetary Policy. San Francisco: Chandler. Craine, R. (1979)
Optimal Monetary Policy with Uncertainty. nomic Dynamics and Cop2trol, 1: 5 9-33.
Journ& of Eco-
Friedman, M. and Heller, W. (1969) Monefav vs. Fiscal Policy. New Yoi,k, N.Y.: The Graduate School of Business Administration, New York University. Kareken, J., Muench, T., and Walla.ce, N. (1973) Optimal Open Market Strategy: The Use of Information Variables. American Economic Review, 63: 156-72. Sumner, M.T. (1980)
The Operation of Monetary Targets. Carnegie-Rochester Conference Series on Public Policy, 13. K. brunner and A.H. Meltzer, eds. Amsterdam: North-Holland.
133