Chapter

CONDUCT OF MONETARY POLICY: GOALS AND TARGETS 411

Preview 411

Goals of Monetary Policy 411

High Employment 411

Economic Growth 412

Price Stability 412

Box 1 Global: The Growing European Commitment to Price Stability 413

Interest-Rate Stability 413

Stability of Financial Markets 413

Stability in Foreign Exchange Markets 414

Conflict Among Goals 414

Central Bank Strategy: Use of Targets 414

Choosing the Targets 416

Criteria for Choosing Intermediate Targets 418

Criteria for Choosing Operating Targets 419

Fed Policy Procedures: Historical Perspective 419

The Early Years: Discount Policy as the Primary Tool 420

Discovery of Open Market Operations 420

The Great Depression 421

Box 2 Inside the Fed: Bank Panics of 1930-1933: Why Did the Fed Let

Them Happen? 421

Reserve Requirements as a Policy Tool 422

War Finance and the Pegging of Interest Rates: 1942-1951 422

Targeting Money Market Conditions: The 1950s and 1960s 423

Targeting Monetary Aggregates: The 1970s 424

New Fed Operating Procedures: October 1979-October 1982 425

De-emphasis of Monetary Aggregates: October 1982-Early 1990s 426

Federal Funds Targeting Again: Early 1990s and Beyond 427

International Considerations 427

Box 3 Global: International Policy Coordination: The Plaza Agreement and the Louvre Accord 428

The Taylor Rule, NAIRU, and the Philips Curve 428

Box 4 Fed Watching 430

Summary, Key Terms, Questions and Problems, and Web Exercises 431

PART V International Finance and Monetary Policy 433

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