“Would you tell me, please, which way I ought to go from here?”

1. “Would you tell me, please, which way I ought to go from here?” • “That depends a good deal on where you want to get to.”.… • Carroll, Alice in Wonderland, p. 64, 1960.

2. Targets and Instruments toolsinstruments intermediate target(s) goals

3. Targets and Instruments toolsinstruments intermediate target(s) goals Examples: thermostatfurnace temperaturefuel expenses

4. Targets and Instruments toolsinstruments intermediate target(s) goals thermostatfurnace temperaturefuel expenses study good gradesgraduate school better jobs

5. Targets and Instruments toolsinstruments intermediate target(s) goals thermostatfurnace temperaturefuel expenses study good gradesgraduate school better jobs FOMOun-borrowed reservesM2GDP

6. Intermediate Target A macroeconomic variable whose value a central bank seeks to control because it believes that doing so is consistent with its ultimate Goal(s) or objective(s).

7. Intermediate Targeting Options There are two options: • Multiple variable targeting

8. Intermediate Targeting Options There are two options: • Multiple variable targeting • Single variable targeting

9. Single Intermediate Targeting • a single variable system requires a smaller amount of information.

10. Single Intermediate Targeting • a single variable system requires a smaller amount of information. • when in doubt, say no. When there is a great deal of contradictory information, procrastinate. This option is not available in a single variable system.

11. Single Intermediate Targeting • a single variable system requires a smaller amount of information. • when in doubt, say no. When there is a great deal of contradictory information, procrastinate. This option is not available in a single variable system • there is no confusion.

12. Single Intermediate Targeting • a single variable system requires a smaller amount of information. • when in doubt, say no. When there is a great deal of contradictory information, procrastinate. This option is not available in a single variable system • there is no confusion.. • Unlike multiple variable targeting, a single variable system allows the Congress, the White house, and the public to evaluate Fed's efficiency and accuracy.

13. Intermediate and Operating Target • Operating targets are those that the Fed has more and immediate control over. These are the:

14. Intermediate and Operating Target • Operating targets are those that the Fed has more and immediate control over. These are the: • Fed Fund rate

15. Intermediate and Operating Target • Operating targets are those that the Fed has more and immediate control over. These are the: • Fed Fund rate • non-borrowed reserves

16. Multiple Intermediate Targeting • Every single variable could give wrong signal at some time

17. Multiple Intermediate Targeting • Every single variable could give wrong signal at some time • There is no one fool proof variable that the Fed could rely on.

18. Multiple Intermediate Targeting • Every single variable could give wrong signal at some time • There is no one fool proof variable that the Fed could rely on. • Multiple variable system would give the Fed more flexibility.

19. Multiple Intermediate Targeting • Every single variable could give wrong signal at some time • There is no one fool proof variable that the Fed could rely on. • Multiple variable system would give the Fed more flexibility. • Multiple variable system would not put the Fed in a precarious position of having to reject the economy’s signal which they might have to do if they are on a single variable system and it is sending a signal that is considered to be wrong.

20. Multiple Intermediate Targeting • Every single variable could give wrong signal at some time • There is no one fool proof variable that the Fed could rely on. • Multiple variable system would give the Fed more flexibility. • Multiple variable system would not put the Fed in a precarious position of having to reject the economy’s signal which they might have to do if they are on a single variable system and it is sending a signal that is considered to be wrong. • Every single variable could give wrong signal at some time.

21. Multiple Intermediate Targeting • Every single variable could give wrong signal at some time • There is no one fool proof variable that the Fed could rely on. • Multiple variable system would give the Fed more flexibility. • Multiple variable system would not put the Fed in a precarious position of having to reject the economy’s signal which they might have to do if they are on a single variable system and it is sending a signal that is considered to be wrong. • Every single variable could give wrong signal at some time. • Any one variable could prove to have some exceptions, e.g., we might choose M2 to be the target because it has stable velocity. It may, as it did, prove that it is not stable

22. Multiple Intermediate Targeting • Assume that the Fed uses a single variable and it is sending a wrong signal and the Fed wants to ignore or discount the wrong signal. Using one variable would put the Fed at a disadvantage because it must admit that it has been using a wrong target for its policy making in the past. This would politically be very expensive. It damages its credibility. If they change the target variable, it looses confidence of the public and of the Congress.

23. Criteria for choosing intermediate targets • Frequently observable. This is not true for all variables. Some, such as interest rates and monetary reserves, could be available on daily basis. Others such as real GDP, prices, and employment are not available for at least one month

24. Criteria for choosing intermediate targets • Frequently observable • measurable. • Accuracy of economic data is one significant measurement problem. For example, even though the Fed knows the quantity of reserves, it does not know the money multiplier with a high level of accuracy.

25. Criteria for choosing intermediate targets • Frequently observable • measurable. • Accuracy of economic data is one significant measurement problem. For example, even though the Fed knows the quantity of reserves, it does not know the money multiplier with a high level of accuracy. • Fed's estimate of the money demand is not precise. It takes a while to come up with a close estimate of the quantity of money demanded. However, the Fed must make a policy decision based on the early and less accurate estimates of the demand for money.

26. Criteria for choosing intermediate targets • Frequently observable • measurable. • Accuracy of economic data is one significant measurement problem. For example, even though the Fed knows the quantity of reserves, it does not know the money multiplier with a high level of accuracy. • Fed's estimate of the money demand is not precise. It takes a while to come up with a close estimate of the quantity of money demanded. However, the Fed must make a policy decision based on the early and less accurate estimates of the demand for money. • Interest rates are not measured accurately either. Other costs of borrowing such as compensating balances and fees are not taken into account.

27. Criteria for choosing intermediate targets • Frequently observable • measurable. • controllable

28. Criteria for choosing intermediate targets • Frequently observable • measurable. • controllable • relatedness to the ultimate goal(s)

29. Aggregate Or Interest Rate Targeting In any market, if we desire to be at the equilibrium, we cannot control both price and quantity.

30. Aggregate Or Interest Rate Targeting In any market, if we desire to be at the equilibrium, we cannot control both price and quantity. We can control only one, either the price or the quantity. If control price, we have to tolerate shortages and surpluses. P Q/t

31. Aggregate Or Interest Rate Targeting In any market, if we desire to be at the equilibrium, we cannot control both price and quantity. We can control only one, either the price or the quantity. If we control quantity , we must be contend with whatever price is set by the market. P Q/t

32. Aggregate Or Interest Rate Targeting Should the Federal Reserve try to keep interest rates or some monetary aggregate at a desirable level?

33. Aggregate Or Interest Rate Targeting Should the Federal Reserve try to keep interest rates or some monetary aggregate at a desirable level? It depends on the source of instability.

34. Aggregate Or Interest Rate Targeting If the instability due to fluctuations in the private investment (the IS curve), we need to aggregates fixed. Income will fluctuate less. LM IS i1 y0 y1 y* y2 y3

35. Aggregate Or Interest Rate Targeting If the instability due to fluctuations in the private investment (the IS curve), we need aggregates to be fixed. Income will fluctuate less. IS’’ LM IS IS’ i1 y0 y1 y* y2 y3

36. Aggregate Or Interest Rate Targeting If the instability due to fluctuations in the private investment (the IS curve), we need to aggregates fixed. Income will fluctuate less. IS’’ LM IS IS’ d E b LM* a c i1 y0 y1 y* y2 y3

37. Aggregate Or Interest Rate Targeting If the instability due to fluctuations in the demand for money (the LM curve), we need to interest rates fixed. Income will fluctuate less. LM’’ LM LM’ IS i1 y1 y* y3

38. Aggregate Or Interest Rate Targeting If the instability due to fluctuations in the demand for money (the LM curve), we need to interest rates fixed. Income will fluctuate less. LM’’ LM LM’ IS LM* i1 y1 y* y3