El comienzo de la historia de la filosofía

Conventionally, central banks appear to use some kind of intermediate target for conducting monetary policy. The main idea behind using an intermediate target is the fact that these variables are more up-to-date in information content than the ultimate target variables. The selected instrument, whether an interest rate or non-borrowed reserves or base money itself and the intermediate target, together form a policy rule in a form that the intermediate target could be systematically influenced by the instrument variables. As noted by Svensson (1997:1126), an ideal intermediate target ‘is highly correlated with the goal, easier to control than the goal, easier to observe by both the central bank and the public than the goal, and transparent so that central bank communication with the public and public understanding and public prediction of the monetary policy are facilitated’. Observations for such variables are available on a more timely and continuous basis than the ultimate target variables like output and general prices. The intermediate target variables are in fact endogenous variables determined by the models.

In conventional monetary targeting, the growth rate of monetary aggregate takes the role of intermediate target but any other endogenous variable can also provide useful information and thus be used as an intermediate target. The important point here is that under a dynamic setting the value of the intermediate target can be observed before some policy decision or adjustment to earlier policy decision is made but the values of the goal variables cannot be observed at the same time. However, deviation in the intermediate target from its expected path indicates likely deviation of a goal variable from its target and thus provides a signal to adjust the

instrument and the operating target variable accordingly. This requires a very tight relationship between the goal variable and the intermediate target.

The information contained in the intermediate target variable can be used in two ways. One is to choose the instrument setting in such a way that the expected deviation in the intermediate target variable from its target be minimized. The second is to use the information to derive an optimal feedback rule by relating the value of the policy instrument to the observed value of the information variable. Under the optimal feedback rule, the information in the intermediate target is used to choose the value of the policy variable that minimizes the loss function itself. Thus the stress here is to minimize the expected deviation of the goal variable from its target instead of minimizing the expected deviation of the intermediate target variable from its target. This kind of use of the information variable dates back to Kareken, et al. (1973). Friedman (1975, 1977) demonstrated that intermediate targeting is inefficient compared to the optimal feedback rule, with both an interest rate as the instrument or reserves as the instrument. Rules obtained in the case of the former did not minimize the variance in the output when compared to the later. Walsh (1998) draws a similar conclusion where the objective function is to minimize expected squared deviations of the inflation rate around a target level. It is shown that the optimal feedback rule out-performs intermediate money targeting, however an intermediate target does better than a policy which does not respond to new information so long as money-demand shocks are small.

Besides growth of broader aggregates of money, the nominal exchange rate has also been used as an intermediate target, particularly as a means to control inflation. As mentioned in Chapter 1, with the breakdown of the relationship between monetary aggregates and goal variables, such as inflation and output, several countries have recently adopted inflation itself as the target, where forecasted inflation is promoted as a potential intermediate target. In the case of an inflation forecast as the intermediate target, Svensson (1997) claims it to be an ideal intermediate target as it is by definition the current variable that is most correlated with the goal. The choice of inflation as the main goal variable is also prompted from the consensus that monetary policy is neutral in the long run, which restricts the set of feasible long-run goal variables for monetary policy, nevertheless, inflation is not the only possibility.

A number of economists such as Bean (1983), Taylor (1985), Hall and Mankiw (1994), McCallum (1997b), McCallum and Nelson (1999) have advocated nominal income as an alternative intermediate target. Nominal GDP growth, which can be thought of as “velocity corrected” money growth (that is, if velocity were constant, nominal GDP growth and money growth would be equal, by definition), has the advantage that it does put some weight on output as well as prices. Under a nominal GDP target, a decline in projected real output growth would tend to be stabilizing. However, as a matter of revealed preference, in recent years, several countries that have adopted explicit policy framework, virtually all have opted for targets expressed in terms of inflation rates, not money stock or nominal income growth rate (McCallum 1999, Bemanke and Mishkin 1997).

There are two major practical disadvantages with the nominal GDP target compared to inflation as target. First, information on prices is timelier and more frequently received than on nominal GDP, which requires collection of data on both current quantities as well as current prices. Second, the public can more easily understand the concept of an inflation target than the concept of nominal income targeting and therefore inflation targeting better serves the objectives of communication and transparency.

In addition, nominal income targeting is not free from theoretical criticism. As can be inferred from the studies of Bean (1983) and West (1986), alternative choices of supply functions give rise to entirely opposite results between choosing nominal income or monetary aggregate as a policy target.40 With a backward-looking supply function, Ball (1997) has shown nominal income targeting as an unstable proposition (also see de Brouwer and O'Regan 1997). Therefore, the results of nominal income targeting are also not model invariant. Further, Hall and Mankiw (1994) point out that the equal weighting of real output growth and inflation implied by nominal GDP

39 Other early works advocating nominal income targeting include Meade (1978), Tobin (1980), Brittan (1981) 40 In his study on a comparison of nominal income targeting with money supply targeting, Bean (1983) used a rational expectation model and measured the desirability of policies by their effect on variance of output around a certain full information level and concluded that monetary policy based on nominal income as an intermediate target is likely to be preferable to a policy based on exogenously determined money provided elasticity of aggregate demand with respect to real balances is less than one. On the contrary, West (1986), showed that, if the objective of monetary policy is to minimize the unconditional variance of output, nominal income targeting can be preferred to fixed money stock if, and only if, the elasticity of aggregate demand with respect to real balances is greater than one, a completely opposite result to Bean (1983).

targeting is not necessarily optimal and, in general, the relative weight put on the two goal variables should reflect social preferences.