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The alternative explanation as- private capital formation (see References Federal Reserve Bank of Cleveland ISSN 0428·1276 sumes that wage- and price-setting box). Without complementary poli- Fellner, William. Towards a Reconstruction May 21,1984 institutions have an inflationary cies, it is doubtful that a decelerat- of Macroeconomics: Problems of Theory and Policy. Washington, DC: American bias. This bias arises because labor ing target path of nominal income Enterprise Institute, 1976. markets adjust slowly to changes could be achieved over a period Gordon, Robert]. "Using Monetary Control in economic conditions. Wage rates short enough for such a strategy to Dampen the Business Cycle: A New often fail to reflect the availability to be credible. Thus, if nominal Set of First Principles;' NBER Working of unemployed workers, either income trageting were to be a suc- Paper Series, No. 1210 (October 1983). Hall, Robert E. "Macroeconomic Policy because of established relation- cessful strategy during disinflation, under Structural Change;' Industrial ships between employers and their it would need to be part of an over- Change and Public Policy. A Symposium wor kers or because of a lack of all economic policy that included sponsored by the Federal Reserve Bank competitive pressure-sometimes a consistent set of micro- and macro- of Kansas City, Jackson Hole, WY: shielded by foreign trade barriers. economic reforms. Otherwise, the August 24-26, 1983. Meade, James. "The Meaning of 'Internal Some advocates of nominal income Federal Reserve would risk losing Balance' ," Economic Journal, vol. 88 targeting who hold this view of the credibility it has already estab- (September 1978), pp. 423-35. ating targets, and policy instru- the strategy of monetary policy- labor markets propose such target- lished with annual targets for Stein, Herbert. Agenda for the Study of ments. The ultimate goals of also provides a statement to the ing as part of a broader economic monetary and credit aggregates. Macroeconomic Policy. Washington, DC: Nominal Income economic policy-price stability public about the intent of policy in strategy that includes some form of Reducing inflation without unfor- American Enterprise Institute, 1982. and high-employment economic the period ahead. Tobin, James. "Stabilization Policy Ten Targeting labor-market reform or policies tunate labor-market consequences Years After," Brookings Papers on Eco- growth-are prescribed in the Full Intermediate targets, like ulti- that would lead to more competi- has proven to be extremely diffi- nomic Activity, 1, 1980, pp. 19-71. by John B. Carlson Employment and Balanced Growth mate goals, cannot be controlled tive behavior. "This involves in- cult. Without actually adopting ___ . "Monetary Policy: Rules, Targets, Act of 1978. Commonly called closely in the very short run. Con- creasing the power of the econom- nominal income targets, it would and Shocks;' Journal of Money, Credit In recent years prominent econ- Humphrey-Hawkins, this act re- sequently, the Federal Reserve also ically disenfranchised outsiders, be unwise to claim that the nomi- and Banking, vol. 15, no. 4 omists from diverse schools of quires the Federal Reserve to report establishes operating targets for var- (November 1983), pp. 506-18. whose availability for work has nal income target framework is Vo1cker, Paul A. "We Can Survive Prosper- thought have urged policymakers to Congress annual financial objec- iables that it controls closely, such little impact on the wages paid superior per se to any other mone- ity." Remarks at the Joint Meeting of the to establish long-term targets for tives-targets for monetary and as reserve aggregates. The operat- insiders or the prices set by their tary policy strategy. Nevertheless, American Economic Association- nominal income} The common aggregate credit growth-consis- ing targets provide guidance for employers" Tobin (1980, p. 66). nominal income targeting offers an American Finance Association, San thread that emerges from these pro- tent with these ultimate goals. the trading desk as it attempts to important advantage to policymak- Francisco, CA, December 28, 1983. posals is to extend the announced The reported monetary and credit achieve the intermediate targets Conclusion ers com pared with monetary aggre- policy horizon beyond one year, objectives are intermediate targets through open-market operations, The Federal Reserve has no direct gate targets alone, especially after thus clarifying the longer-run that provide guidance for policy a policy instrument. Operating authority over labor markets, disinflation has been achieved. Per- intent of policy. In this Economic action. While not themselves the targets must be reliably related to nor can it prevent trade barriers. haps one use of a nominal income Commentary, we describe the ultimate concern of policymakers, intermediate targets, just as inter- Neither does it choose the amount of guideline would be to serve as a current framework for monetary the behavior of the intermediate mediate targets must be reliably the economy's resources claimed by framework to explain adjustments policy and suggest that a multi- target variables provides informa- related to ultimate goals. The oper- government, a ratio that in part to monetary targets. year nominal income target could tion about the current and future ating targets thus provide imme- determines the rate of our nation's be viewed as a practical extension levels of economic activity. Having diate feedback as to the consistency of current policy procedures. To be intermediate targets is useful, of policy actions with achievement useful, a nominal income target for because the transmission of mone- of the intermediate objective. The monetary policy would need to be tary policy to ultimate policy targets specification of operating targets is credible and hence achievable over is slow and uncertain. Another sometimes called the tactic of mon- Federal Reserve Bank of Cleveland BULK RATE a reasonably predictable period advantage to using some interme- etary policy, to be distinguished Research Department U.S. Postage Paid of time. In this article we also iden- diate targets is that they can be from strategy (i.e., the specification P.O. Box 6387 Cleveland, OH tify some potential problems for observed more frequently than of intermediate targets). Cleveland, OH 44101 Permit No. 385 nominal income control, particularly ultimate goals and hence provide Since the fall of 1982, the oper- during periods of disinflation. more immediate feedback about the ating target has been discount- effectiveness of policy actions. If window borrowing. To achieve the Semantics of the intermediate targets are relia- targeted level of borrowings, the Monetary Policy bly related to ultimate goals, policy Federal Reserve conducts open- The current framework for mon- actions that attain intermediate market operations (the instrument) etary policy is hierarchical, defined target values will therefore be that directly change the level of in terms of ultimate goals, inter- compatible with ultimate goals. non borrowed reserves. Total re- mediate targets, short-run or oper- Specification of annual interme- serves not supplied by open-market diate target values-often called operations are created through John••B. Carlson is a monetary economist at ••1. See Meade (1978), Tobin (1980, 1983), Stein the Federal Reserve Bank of Cleveland. Kim (1982), Fellner (1976), Gordon (1983), and Hall Kowalewski, Mark Sniderman, and Ed Stevens (1983). Gordon essentially advocates a final provided valuable comments throughout the prep- spending target. The various proposals also Address Correction Requested: Please send •• aration of this article. differ on whether to target levels or rates corrected mailing label to the Federal Reserve The views stated herein are those of the author of change, an issue that is not considered here. Bank of Cleveland, Research Department, and not necessarily those of the Federal Reserve P.O. Box 6387, Cleveland, OH 44101. Bank of Cleveland or of the Board of Gover- nors of the Federal Reserve System. discount-window borrowing. The That is, price stability is defined Nominal Income as are made for three or more years. effects on nominal income are much level of borrowings affects the in terms of the economic impli- a Policy Strategy When parties to these contracts fail less direct. Consequently, the time' Caveat Deficit to anticipate correctly the status horizon over which the Federal opportunity cost of funds and, in cations of expected price changes. Given the current framework for Another problem raised by opponents turn, the growth of several mone- Volcker 's concept stresses the future monetary policy, it is not surprising of nominal income targeting concerns of the economy in future years, they Reserve may be expected to control tary aggregates (intermediate tar- as opposed to the past and sug- that advocates of nominal income the composition of real output. Ideally. often are required to make adjust- nominal income reliably is consid- gets). The Federal Reserve believes gests the importance of anticipated targeting would seek the benefits policy makers seek to create an envi- ments in output that frustrate ered longer and more variable than its monetary growth paths are con- future influences on the economy, that might result from a credible ex- ronment that generates adequate incen- the goal of high-employment eco- it is for money. This does not, how- tives for saving and capital formation.

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