Monetary Policy: Intermediate Targets and Final Goals

Monetary Policy Strategies: Intermediate Targets and Final Goals

Monetary policy involves instruments leading to intermediate objectives, which ultimately aim for final goals.

The First Level: Intermediate Objectives

At this level, authorities aim to achieve certain objectives by controlling past, and therefore compliance, intermediate objectives. The intermediate goal becomes the centerpiece of the strategy and objective. It is assumed that only by achieving it is the ultimate goal attainable. Programming at this level is usually done for one year.

For intermediate targets to fulfill their role within the strategy, the chosen variable(s) must satisfy the following conditions:

• Maintain a stable relation with ultimate goals.
• Be amenable to short-term monetary authority control.
• Allow for accurate information regarding their development in a short time.

Intermediate objectives are set based on one or more of these variables:

• Monetary aggregates.
• Types of long-term interest rates.
• Exchange rate.

The Second Level: Operational Management

At this level, authorities try to regulate the evolution of the variable on which an interim target is set by controlling an operational variable. The time reference for this level is less than one year because it is an operational management level in the short term (usually one month).

Operational variables are monetary variables that are under the direct influence of the monetary authority and facilitate the tracking and control of the intermediate target. The criteria to verify the variable(s) acting as operational variables are:

• Be observable.
• Be capable of direct control by the monetary authority.
• Be an actively variable.

Among the variables that meet these requirements are:

• The banking liquidity (measured by the AcSB).
• The monetary base.
• Interest rates in the short term.

Direct Monitoring Strategy: Last Goal Achievement

The main feature of this strategy is that the ultimate objective (price stability) is pursued directly, regardless of setting intermediate targets. This strategy has enabled remarkable achievements in the fight against inflation in certain economies. For example, Spain overcame problems and limitations of the traditional two-tier strategy using this approach.