The determinants of monetary target credibility

Abstract

This paper examines the impact of several different factors on the credibility of the Federal Reserve's monetary targets. Two factors appear to explain why the targets became less credible during the 1980s. First, the Fed's shift from M1 to M2 targets reduced credibility because the latter aggregate is less controllable. Second, velocity instability caused the Fed to widen the target ranges and this action signaled that they were placing less weight on monetary targets in the conduct of monetary policy.