Duwendag, Die e
A icle
The "New E a" o Con olling Mone a y Agg ega es
K edi und Kapi al
P o ided in Coope a ion wi h:
Duncke & Humblo , Be lin
Sugges ed Ci a ion: Duwendag, Die e (1977) : The "New E a" o Con olling Mone a y Agg ega es,
K edi und Kapi al, ISSN 0023-4591, Duncke & Humblo , Be lin, Vol. 10, Iss. 3, pp. 391-402,
h ps://doi.o g/10.3790/ccm.10.3.391
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h ps://hdl.handle.ne /10419/292799
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Be ich e
The "New E a" o Con olling Mone a y Agg ega es*
Since abou 1975 a ma ked shi owa ds con olling mone a y ag-
g ega es has aken place in se e al coun ies. Among o he s, he cen al
banks o Swi ze land and Ge many (a he beginning o 1975), o he
Uni ed S a es (in Ma ch 1975), o Canada (in ea ly 1976), and o he
Uni ed Kingdom (in July 1976) adop ed a policy o mone a y g ow h
a ge s. Wha dis inguishes he new s a egies o he cen al banks
men ioned is he s ingency in pu suing mone a y g ow h a ge s. So
a he Swiss Na ional Bank (SNB), he Deu sche Bundesbank, and he
Fede al Rese e (Fed) ha e ealized he s ic es app oach o con ol-
ling mone a y agg ega es. The e o e, his epo concen a es on hese
cen al banks, oughly ou lining he ea u es which a e common o
hei s a egies and e alua ing some special p oblems o hei new
app oaches.
I. Cha ac e is ic ea u es o he "New E a"
Wha 's new abou he "New E a"? Is i eally a "new" e a? No
doub , ha one has o be e y ca e ul in using such a lo y quali ica ion.
Thus, i is pe haps less ambi ious o simply speak o "expe imen s"
in mone a y policy as he cen al banks hemsel es ha e epea edly
emphasized. The essen ial cha ac e is ics o he "new e a" o "ex-
pe imen " can be b ie ly summa ized in he ollowing six poin s:
1. Mos ob ious, he cen al banks commi ed hemsel es o publicly
announce and o pu sue mone a y g ow h a ge s. In compa ison wi h
he p e ious p ac ice his s a egy is a cou ageous s ep on a new
g ound, in pa icula i we conside he gene al eluc ance o cen al
banks in making expe imen s, in se ing up and in publicly announcing
quan i a i e a ge s.
* Summa y o pape s p epa ed o 1) he "Commi ee on Mone a y Theo y
and Mone a y Policy" o he Gesellscha ü Wi scha s- und Sozialwissen-
scha en (Ve ein ü Socialpoli ik), and 2) he 1977 "Kons anze Semina
on Mone a y Theo y and Mone a y Policy". The de ailed and empi ically
suppo ed e sion will be published in a olume o he „Sch i en des Ve -
eins ü Socialpoli ik", o hcoming 1978.
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392 Be ich e
2. The adop ion o mone a y g ow h a ge s was accompanied wi h
a ansi ion o b oade mone a y agg ega es. This no ion co e s a la ge
spec um o de ini ions o he money s ock in he a ious coun ies,
implying ha a policy o mone a y g ow h a ge s is no ied o a
speci ic de ini ion o he money s ock.
3. The unde lying a ionale o he new policy o ien a ion — expli-
ci ly ocused by all cen al banks — is o educe sho - un cyclical
ins abili y in economic ac i i y. Mone a y g ow h a ge s a e supposed
o es o e a sense o g ea e s abili y and con idence in economic pe -
o mance. Thus, "s abili y" o "s abiliza ion" is he c ucial and almos
magic wo d o he new s a egy. The a gumen goes ha he expec-
a ions and decisions o economic agen s could be s abilized by gi ing
hem in ad ance a mone a y amewo k (a so o "mone a y budge -
ing"). No doub , ha he bad expe iences wi h s op-and-go p ac ices,
wi h ime lags and he ensuing dange o p ocyclical e ec s o pas
mone a y policy ha e acili a ed he mo e owa ds mone a y g ow h
a ge s.
4. In compu ing he mone a y g ow h a ge he longe - un pe spec-
i e is explici ly aimed a g adually educing he g ow h a e o he
money s ock o a le el compa ible wi h he longe - e m g ow h a e
o po en ial physical ou pu . Being s ill a long way om ha objec i e
he compu a ion o mone a y g ow h a ge s has o ake in o accoun
also some cyclical componen s, such as p edic ed changes in capaci y
u iliza ion, in income eloci y o money, and in he a e o in la ion.
5. The ac ical elemen o he new s a egies lies in a ce ain shi o
esponsibili y o in la iona y p ice shocks. By se ing a mone a y
amewo k in ad ance and by publicly announcing he decomposi ion
o mone a y g ow h a ge s — he so-called "una oidable" a e o
in la ion on he one hand, and he expec ed g ow h a e o eal GNP
on he o he — he mone a y au ho i ies seek o se some disciplina y
da a in o de o a ec he p ice and wage policies o bo h p i a e
pa ies and he Go e nmen . Whe he o no such a disciplina y e ec
will be a ained ul ima ely, is ano he ques ion. In any case, howe e ,
he con enien excuse o an o e ly mone a y alimen a ion o in la ion
alls away. Thus, he g oup o hose who a e esponsible o in la-
iona y p ice shocks is na owed.
6. Las bu no leas , he "New E a" seems o be deeply imbedded in
he mone a is doc ine, e en hough mos cen al banks do no ex-
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Be ich e 393
plici ly p o ess o mone a ism. Ac ually, he shaping and p ac ical
implemen a ion o mone a y policy di e ge mo e o less om he policy
ecommenda ions o he mone a is s. Thei basic ideas, howe e , ecu
ime and again. So he "New E a" may be pe haps quali ied as "ex-
pe imen s in p ac ical mone a ism", as Paul A. Volcke , P esiden o
he Fede al Rese e Bank o New Yo k, pu i mos ecen ly.
II. Elemen s o he s a egic app oaches
1. In e alua ing he new mone a y s a egies h ee elemen s a e o
be analyzed: (1) The ins umen s, (2) he mone a y indica o s which
a e simul aneously con ol a iables, (3) he in e media e a ge s. Con-
ol a iables bundle up he nume ous e ec s emi ed by he cen al
bank's mone a y impulses in only one o wo magni udes. Because o
his p ope y con ol a iables a e also bes sui ed o se e as mone a y
indica o s. Changes in con ol a iables a e supposed o b ing o o
keep he in e media e a ge on ack. A p oblem o mone a y seman-
ics is ha he cen al banks' "o icial" e minology no mally does no
speak abou "in e media e a ge s", "con ol a iables" and "mone a y
indica o s". Thus, o analy ical pu poses i is necessa y o in e p e
as objec i ely as possible he published epo s o he Fed, he SNB and
he Bundesbank in e ms o he elemen s men ioned. These elemen s
a e summa ized in he ollowing jux aposi ion:
Mone a y indica o s/
Con ol a iables In e media e a ge s
Bundesbank: FLR (iCB) CBM
SNB: Ba (iCB) M
Fed: RA (FFR) MU2,3 (longe - un),
M1%V (sho - un), FFR (?)
2. Wi h espec o he ins umen s o mone a y policy, by and la ge,
no hing has changed as compa ed o he si ua ion p io o he "New
E a". Simila holds o he mone a y indica o s and con ol a iables,
espec i ely. Common o all cen al banks' concep s is ha hese a i-
ables include a leas one componen , i.e. excess ese es (ER), which
signal he u u e expansion po en ial o banks. Wi hin he Bundesbank's
app oach he " ee liquid ese es" o banks (FLR) a e s ill employed
as mone a y indica o and, a he same ime, as con ol a iable. The
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394 Be ich e
FLR consis exclusi ely o banks' u u e expansion po en ial, com-
p ising hei ER and — as "po en ial" cen al bank money — hei
open ediscoun quo as and hei holdings o money ma ke pape s
e u nable o he Bundesbank a any ime. Thus, in he Bundesbank's
concep he aged " ee ese es doc ine" seems o be p e y well ali e.
In he Fed's app oach he indica o and con ol a iable unc ions a e
ul illed, now as be o e, in pa icula by a ious ese e agg ega es (RA),
such as he mon a y base, o al o nonbo owed ese es, and he RPDs.
Only in Swi ze land a ma ked shi ocu ed in so a as he "adjus ed
mone a y base" (Ba = mone a y base minus SNB's e inancing c edi s
g an ed o banks) is now designed o se e as mone a y indica o and
con ol a iable. icB ( hose in e es a es which he cen al bank is able
o ix di ec ly) and FFR (Fede al unds a e) a e se in pa en heses.
This is o indica e ha hese a iables also unc ion o a ce ain deg ee
as mone a y indica o and con ol a iable in he pe inen cases, pa -
ially as supplemen s, pa ially as e lexes o changes in he liquidi y
and ese e agg ega es. Due o he ela i e unimpo an ole o icB
in he Fed's concep ion he FFR eplaces icB.
3. Wi h espec o he in e media e a ge s each cen al bank has
i s own speciali y: Wi hin he Bundesbank's concep i is he CBM
("cen al bank money" in he speci ic de ini ion o he Bundesbank).
The CBM is a money s ock de ini ion sui gene is, om he uses side
comp ising all cu ency in ci cula ion and aul cash o he banks plus
equi ed ese es calcula ed a cons an ese e a ios. The CBM con-
sis s exclusi ely o "used up" ac ual cen al bank money. Mo eo e ,
due o he composi ion o he CBM he e is (empi ically) a signi ican
pa s-p o- o o-iden i y be ween he M3-agg ega e and he CBM. Thus,
he CBM is a mone a y agg ega e and no a ese e agg ega e, as i
is o en in e p e ed. The CBM is he e o e no an indica o o whe he
mone a y impulses ha e been emi ed, bu o whe he hey ha e shown
up — oge he wi h all he o he in luences besides mone a y policy —
in he agg ega es Mi,
2,3.
The SNB has chosen he Mi-agg ega e in he
usual de ini ion as i s in e media e a ge . Unlike he Swiss and he
Ge man cen al bank he Fed speci ies ole ance anges and announces
a ge alues o ou a iables: (1) o he 12-mon hs g ow h o he
Mi,e,3-agg ega es and he c edi p oxy; (2) o he 2-mon hs g ow h
o he agg ega es Mi and Mg; (3) o he mon hly e olu ion o he FFR,
and (4) — un il Ma ch 1976 — o he mon hly g ow h o he RPD-
ese e agg ega e. Whe eas he Mi,2,3-agg ega es a e employed as
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Be ich e 395
in e media e a ge s, he ole o he FFR emains somewha unclea
(see IV).
4. The ac ha single numbe a ge s (SNB, Bundesbank) simula e
a p ecision o mone a y con ol which ac ually does no exis , is o en
men ioned as a disad an age. On he o he hand, howe e , he Fed's
p ocedu e gi es he e y same imp ession when he uppe and he
lowe limi s o he Mi,g,3- ole ance anges a e changed by 0.5 pe -
cen age poin s.
III. Techniques o con olling mone a y agg ega es
Common o he mone a y con ol echniques o all h ee cen al
banks a e he ollowing ea u es and p oblems, espec i ely:
1. On p inciple, he adop ion o mone a y g ow h a ge s does no
mean ha ad hoc-measu es ha e been gi en up. Ra he , he e y con-
ol policy con inues o be disc e iona y, ha is o say a policy o
"ad hocce y".
2. The echnique o con olling mone a y agg ega es may be deno ed
as "indi ec con ol mechanism". Disc e iona y injec ions o abso p ions
o ac ual o po en ial cen al bank money a e supposed o change he
con ol a iables, he eby a ec ing he money ma ke a es and subse-
quen ly adia ing ou om he money ma ke on he whole in e es a e
s uc u e o he a ious inancial ma ke s. The ansmission o changes
in he con ol a iables o he in e media e a ge s is iewed by all cen-
al banks as a po olio adjus men p ocess gene a ed h ough in e es
a e impulses which ul ima ely lead o changes in he g ow h a es o
mone a y agg ega es. The con ol de ices o all cen al banks a e hus
based on p ice espec i ely in e es a e- heo e ical g ounds. To judge
om he cen al banks' s a emen s he ansmission o mone a y im-
pulses o he in e media e a ge s p ima ily uns h ough he banking
sec o wi h c edi in e es a es and he demand o and he supply
o bank c edi as key a iables.
3. The main p oblems o con olling mone a y agg ega es a e he
uning and he iming o con ol a iables, and in addi ion, he ime
lags. The c ucial poin is: When and by how much should RA (B®, FLR)
be changed o b ing o o hold
Mi, 2,3
(Mi, CBM) "on a ge "? And how
long does i ake un il changes in he con ol a iables a ec he com-
posi ion o banks' and nonbanks' po olios? The plain ac is ha , up
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396 Be ich e
o now, a eliable basis is missing o calcula ing he app op ia e change
in con ol a iables equi ed o achie e a ce ain mone a y g ow h
a ge . Wha would be needed a e empi ically suppo ed and p edic -
able expe iences abou he po olio beha io o banks and nonbanks
o escape om he " ial and e o " me hod used so a .
4. Along wi h his p oblem, luc ua ions o conside able size in he
eloci y o money and in he money mul iplie s ha e p o ed o be a
se ious dis u bing ac o o he con ol policy o all h ee cen al
banks. These luc ua ions e lec , al hough no exclusi ely, also changes
in he po olio beha io .
IV. The pe omance o he new s a egies
On he basis o he sho expe ience i would be down igh a spec-
ula i e endea o o judge whe he he "New E a" was a success o
no . Wi h espec o he implemen a ion p ocedu e and he pe o mance
o he new s a egies, howe e , some in e ences can al eady be d awn.
1. The Bundesbank was aced in pa icula wi h he ollowing
p oblems:
a) I s main p oblem we e ex emely luc ua ing FLR-mul iplie s (mFLR
= CBM/FLR) which made he con ol o he CBM-g ow h a e
eno mously di icul . As ecen expe ience shows, mFLR luc ua ed
be ween he ex eme alues o 45 and 7 wi hin a pe iod o only 6
qua e s (Q3/1974 - Q4/1975) wi hou a ec ing he speed o expan-
sion o he CBM e y much. Conside ing hese wide luc ua ions i
is ye somewha amazing ha he CBM-g ow h a ge s o each 8 %
in bo h pas yea s we e only sligh ly o e sho .
b) Acco ding o he Bundesbank he CBM is designed o se e as an
"indica o o mone a y expansion", a con using no ion which has
ne e been de ined p ecisely, bu which is ne e heless ime and
again s essed by he Bundesbank. Ac ually, he e is no oom le
o he so-called "mone a y expansion" in he Bundesbank's ap-
p oach. Since he CBM la gely is a educed copy o he Ms-agg ega e
he CBM measu es i sel — o exagge a e a li le bi .
c) The analyses o he Bundesbank do no show on wha heo e ical
and empi ical basis he composi ion and weighing o he CBM-
componen s es o whe he he e is such a basis a all. A p io i
he CBM-de ini ion seems a bi a y. I s ob ious ad an age is only
ha he CBM is la gely independen o shi s among deposi s.
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Be ich e 397
d) E en hough his aspec is o mino ele ance o he cons uc ion
o an in e media e a ge , he pe o mance o he CBM as in e -
media e a ge o e he pas i e yea s was by a supe io as com-
pa ed wi h o he mone a y agg ega es — in he meaning o he
smalles a iances be ween he g ow h a es o bo h CBM and
nominal GNP.
e) The Bundesbank explici ly includes expec ed changes in he eloci y
o CBM in he compu a ion o he CBM-g ow h a e, he eby b idg-
ing a gap o a magni ude (nominal GNP) which is abou 10 imes
as g ea as he CBM. Bad miscalcula ions o he eloci y o CBM
migh esul in sho - un e isions o he CBM-g ow h a ge ,
he eby cas ing conside able doub on he desi ed s abilizing e ec
and on he c edibili y o he new s a egy.
2. Some majo de iciencies o he SNB's app oach we e:
a) As expe ience shows so a , he SNB has chosen wi h Mi an in e -
media e a ge which is a a iable oo na ow and ola ile because
o shi s in nonbank deposi s. Simila holds o Ba as con ol a iable.
Ex emely wide luc ua ions o he BMnul iplie and a conside able
o e - espec i ely unde shoo ing o he Mi-g ow h a ge — speci-
ied a a le el o each 6°/o in bo h pas yea s — ha e been he
consequence. To judge om ecen expe ience he combina ion o
no adjus ed mone a y base and a b oade mone a y agg ega e, say
o M3, showed a a be e co ela ion — again in he meaning
o he smalles de ia ions be ween he g ow h a es o bo h a i-
ables, hus possibly sugges ing an adop ion o ha combina ion.
E en hough Ba has analy ical ad an ages as mone a y indica o ,
wi h espec o he p ac ice o con olling Mi, howe e , he elimina-
ion o e inancing c edi s seems o be a somewha a i icial sepa a-
ion o de e minan s o Mi which belong oge he .
b) M2 as in e media e a ge (ins ead o Mi) would ha e had he ad-
an age o pa ially iden ical g ow h a es o bo h M2 and nominal
GNP o e he pas i e yea s wi h co espondingly small luc ua ions
o he eloci y o Mg. In con as , he g ow h a es o bo h nominal
GNP and Mi did no show any connec ion wha soe e .
c) The SNB's p ocedu e o se he same a ge alue (o a a ge alue
a all) o bo h he con ol a iable and Mi is e y ques ionable,
i he espec i e money mul iplie is highly uns able (as i ac ually
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398 Be ich e
was du ing he pas i e yea s). Fo 1977 he SNB has, p esumably
he e o e, enounced o publicly speci y a a ge alue o Ba.
d) Fo eign ese e ansac ions o he SNB ha e so a been he mos
impo an le e o a ec he mone a y base. This p ac ice is subjec
o cons ain s in so a as he a emp o keep he Swiss exchange
a e s able and, a he same ime, he domes ic mone a y g ow h
a e on a ge is no always compa ible. In hose cases o he ins u-
men s o mone a y policy need o be in ensi ied.
3. The Fed's app oach was impai ed by he ollowing p oblems:
a) A se ious de ec was ha , wi h espec o he se ing o mone a y
g ow h a ge s, no consul a ions wi h he Fede al Go e nmen ook
place. Fu he mo e, he Fed did no make public he componen s
o mone a y g ow h a ge s, o ins ance, wha is conside ed as
"una oidable" a e o in la ion. Since he new app oach is o a
g ea ex en based on psychological g ounds, mo e public ela ions
by means o publicly announcing he decomposi ion o mone a y
g ow h a ge s could possibly imp o e he pe o mance o he
new s a egy.
b) I is e y di icul o judge whe he he Fed's app oach has been a
success o no , especially due o he simul aneous announcemen o
a ge alues o ou di e en mone a y a iables, mo eo e , due
o he ex emely wide ole ance anges, and also due o he changing
bases o he compu a ion o a ge alues o he longe - un Mi.g.u-
agg ega es.
c) The simul aneous se ing o in e es a e and quan i y a ge s sha p-
ly aises he p oblem o consis ency, because only a small numbe
o in e dependences be ween he mone a y a iables can be buil
in o an empi ical model.
d) The wide ole ance anges may be conside ed by he Fed as "po-
li ical ad an age" and "mone a y lexibili y", especially in he ligh
o House Concu en Resolu ion 133. F om an economic poin o
iew, howe e , his p ac ice is ques ionable because he pu sui
o ei he he lowe o he uppe limi o hose wide ole ance anges
may ha e e y di e en e ec s on economic ac i i y. Thus, as long
as he anges o he annual Mi,2,3-g ow h a ge s a e no con-
side ably educed, i is ha d o belie e ha a policy o con olling
he money s ock is eally se iously ea ed by he Fed.
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