Intermediate monetary targets and macroeconomic fluctuations

It is investigated whether the choice of intermediate target has altered macroeconomic fluctuations and whether the observed changes are consistent with predictions from economic theory. Since implications from the theoretical literature focus on the effects of structural disturbances, an empirical analysis must identify these effects. The structural vector autoregressive (VAR) technique estimates structural disturbances using restrictions from standard macroeconomic theory. Based on descriptions of actual targeting procedures by insiders to Federal Reserve policy decisions, the intermediate target for the United States is identified as the interest rate from 1951 to 1969 and money from 1970 to 1986. VAR models are estimated over each subsample to assess whether the estimated structural disturbances cause endogenous variables to behave as economic theory predicts. Tests are also performed to assess whether or not the targeting rule affects the variance of endogenous variables attributable to structural shocks. The impulse responses are typically consistent with economic theory, with a few exceptions that have been similarly noted by other researchers. All significant differences in variance are predicted by economic theory, except for one which can be explained by unusually large shocks to defence expenditures that coincided with the monetary targeting episode.