Poole's Rules Revisited: Targeting with Multiple Money Aggregates

Abstract

This paper extends Poole's well-known analysis of interest rate and money targeting to a world in which there are two money aggregates. First, it develops a model of financial intermediation in which banks are induced to supply savings (M2) accounts to attract funds in order to purchase bonds. This allows the development of a supply relationship between Ml and M2 such that the Fed can target either one but not both aggregates. Then, using the IS-LM framework, it evaluates the merits of targeting Ml, M2, and the rate of intrest. (ESl, E52)