Abstract
This study examines the relationship between the use of monetary aggregates as intermediate targets in stabilization policy and the appropriate monetary policy response to past deviations in the aggregates from their target levels. As a first step, the optimal money stock is related to ultimate targets-such as full employment and price stability-in the context of a stabbilization policy derived as the solution to the Linearquadrati-Gaussian optimal control problem. Then the economy is perturbed by shocks to both the real and financial sectors, leading to deviations in the money stock from its tsrget values. The optimal responses to these shocks and the resulting money stock deviations are examined and compared to responses based on two alternative monetary policy mechanisms: a monetarist type and a stylized version of the procedure adopted by the monetary authority pursuant to House Concurrent Resolution 133.
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