Sunday, July 19, 2009

the nominal interest rate as an intermediate target

Among all possible intermediate target variables, nominal interest rates stand out for several reasons. First, interest rates may be observed frequently by the fed. Average data on interest rate on financial instruments are available to the fed daily, and the fed can track some interest rates by the hour. As we noted above, measurability and timeliness are key criteria for an intermediate target, and so nominal interest rate clearly fit the bill on these points.
The fed also has considerable ability to influence nominal interest rate through purchases and sales of government securities. Consequently, the fed may be able to exercise significant control over nominal interest rates, at least in the short run. In principal, then, nominal interest rates appear to be potentially controllable by the fed.
The key issue, then, is whether or not a nominal interest rate target is consistent with the fed‘s ultimate goals.

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