The "New Era" of Controlling Monetary Aggregates

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 This Ve sion is a ailable a : h ps://hdl.handle.ne /10419/292799 S anda d-Nu zungsbedingungen: Die Dokumen e au EconS o dü en zu eigenen wissenscha lichen Zwecken und zum P i a geb auch gespeiche und kopie we den. Sie dü en die Dokumen e nich ü ö en liche ode komme zielle Zwecke e iel äl igen, ö en lich auss ellen, ö en lich zugänglich machen, e eiben ode ande wei ig nu zen. So e n die Ve asse die Dokumen e un e Open-Con en -Lizenzen (insbesonde e CC-Lizenzen) zu Ve ügung ges ell haben soll en, gel en abweichend on diesen Nu zungsbedingungen die in de do genann en Lizenz gewäh en Nu zungs ech e. Te ms o use: Documen s in EconS o may be sa ed and copied o you pe sonal and schola ly pu poses. You a e no o copy documen s o public o comme cial pu poses, o exhibi he documen s publicly, o make hem publicly a ailable on he in e ne , o o dis ibu e o o he wise use he documen s in public. I he documen s ha e been made a ailable unde an Open Con en Licence (especially C ea i e Commons Licences), you may exe cise u he usage igh s as speci ied in he indica ed licence. h ps://c ea i ecommons.o g/licenses/by/4.0/ 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. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.10.3.391 | Gene a ed on 2023-01-16 12:42:19 392 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- OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.10.3.391 | Gene a ed on 2023-01-16 12:42:19 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 OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.10.3.391 | Gene a ed on 2023-01-16 12:42:19 394 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 OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.10.3.391 | Gene a ed on 2023-01-16 12:42:19 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 OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.10.3.391 | Gene a ed on 2023-01-16 12:42:19 396 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. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.10.3.391 | Gene a ed on 2023-01-16 12:42:19 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 OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.10.3.391 | Gene a ed on 2023-01-16 12:42:19 398 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. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.10.3.391 | Gene a ed on 2023-01-16 12:42:19