Improving Monetary Control

IN RECENT YEARS MONETARY POLICY MAKERS have moved far in the direction of regarding the money stock as their principal instrument. It is a reasonable shorthand description of this change to say that policy makers now control the money stock in the light of forecasts of economic activity and movements in interest rates, whereas before 1970 they controlled interest rates in the light of forecasts of economic activity and movements in the money stock. Nonetheless, the "control" actually exercised by the Federal Reserve is not exact, whether it chooses interest rates or the money stock as its instrument. Between 1951 and 1970 control of interest rates was not exact because it was felt desirable to let market forces have a considerable impact on them. Since 1970 the money stock has not been controlled exactly because it is deemed desirable to cushion short-run movements in interest rates by permitting the money stock to fluctuate around a target path. Experience since 1970 has added an issue to the debate over the desirability of controlling the money stock rather than the interest rate. This issuethe technical feasibility of controlling the money stock-is the subject of this paper. Such a question has never arisen with respect to interest rates.1 * The authors alone share responsibility for all views expressed and for any errors of analysis. 1. It should be emphasized that this statement refers to short-run periods. Interest rates pegged at an unchanged level in the long run produce cumulative economic movements away from equilibrium-Wicksellian cumulative movements-that ultimately