Do Announced Monetary Targets Enhance Federal Reserve Credibility?

Abstract

Since 1978 the Federal Reserve has been announcing target ranges for the rate of monetary growth for several monetary aggregates. This paper examines whether the announced monetary growth targets for the Ml and M2 definitions of money enhance Fed credibility with major money market participants. Money Market Services, Inc. surveys securities dealers on their projections of the value of the money supply. Specification tests are performed to determine if the money market participants surveyed employ the information on the announced target ranges when they formulate their expectations. If the tests indicate that the value of the announced target influences the value of expectations of money, it will be interpreted to mean that the value of the announced target is an important part of the information set that money market participants employ in formulating their expectations. That is, that the announced targets enhance the credibility of the Federal Reserve with major money market participants. (ES2 and E58)