Monetarists have long been advising policy makers to conform policy decisions to a rule which would set the long-run monetary growth at a rate consistent with real economic growth. The contention is that variability in the rate of growth of the money supply, combined with excessive rates of growth, result in economic havoc accompanied by high rates of inflation and that attempts to employ discretionary counter-cyclical monetary policy are destabilizing.
This paper analyzes monetary policy decisions in the years 1980-83 in an attempt to determine the weight given to meeting the announced long-run targets recognizing that departures from that goal might be deemed necessary by changing economic conditions. The first section briefly outlines the much talked about policy change in October 1979 which has been interpreted as a Fed commitment to the monetarists' desired policy. The second section delineates the models which were estimated to analyze policy decisions following the October 1979 policy change and to determine the extent to which policy was made in an attempt to meet the stated long-run targets. The empirical results from estimation of the models in section two are presented in the following section. The fourth section delineates a rationale for the observed policy behavior and the final section presents a conclusion.
Peterson, Susan B. 1984. "Long Run Targets and FOMC Policy Decisions." E.C.R.S.B. 84-8. Robins School of Business White Paper Series. University of Richmond, Richmond, Virginia.