Linking Tools to Objectives0Figure18.5Instruments,Targets,andObjectivesUsing policyinstrumentsto targetobjectives directlyFinalIntermediateOperatingLinkLinkObjectivesTargetsInstruments#1#2Examples:Examples:Examples:InterestRatesGrowthinMonetaryLowinflationMonetaryBaseHighGrowthAggregatesLink#321-16
21-16 Linking Tools to Objectives
Linking Tools to ObjectivesC3. Use of (Operating and Intermediate) TargetsSuppose that the Bank wants to achieve a 5%rate of growth for nominal GDP and is targetingan aggregate (say M1+). If the Bank feels that the5% nominal GDP growth rate will be achieved bya 4% growth rate for M1+ (its intermediatetarget), which will in turn be achieved by a 3%MB growth rate (its operating target), it will use itstools to achieve the 3% MB growth rate.21-17
21-17 Linking Tools to Objectives • 3. Use of (Operating and Intermediate) Targets • Suppose that the Bank wants to achieve a 5% rate of growth for nominal GDP and is targeting an aggregate (say M1+). If the Bank feels that the 5% nominal GDP growth rate will be achieved by a 4% growth rate for M1+ (its intermediate target), which will in turn be achieved by a 3% MB growth rate (its operating target), it will use its tools to achieve the 3% MB growth rate. •
Use of (Operating andOIntermediate)TargetsAfter implementing this policy, if the Bankfinds that MB is growing too slowly, it canuse open market purchases to increase itSomewhat later the Bank will begin to seehow its policy affects the growth rate ofM1+. If M1+ is growing too fast (say at7%), the Bank will reduce its open marketpurchases or make open market sales toreduce the M1+ growth rate21-18
21-18 Use of (Operating and Intermediate) Targets • After implementing this policy, if the Bank finds that MB is growing too slowly, it can use open market purchases to increase it. Somewhat later the Bank will begin to see how its policy affects the growth rate of M1+. If M1+ is growing too fast (say at 7%), the Bank will reduce its open market purchases or make open market sales to reduce the M1+ growth rate