利率与货币供给interestrateapproachmoneysupplyapproach,.doc

Topic two: interest rate approach VS money supply approach, Poole’s model T221 bof: P 65, P 325 As illustrated by the graph, for a given demand for central bank money by the banks, there will always be a fixed relationship between monetary base and the money market rate. The central bank’s decision to aim at a particular target value for the money market interest rate thus directly implies a particular amount of central bank money. Conversely, a central bank that is pursuing a fixed target for the level of central bank money is no longer free to determine the interest rate level on the money market. Interest rate targeting is always preferable to monetary base targeting when, for at least some of the time, a necessary condition for implementing the chosen approach is stability in the money market rate. This is clearly the case when a central bank pursues a policy in which it seeks to control the price level directly via money market interest rates (inflation targeting). Interest rate targeting is also essential when the exchange rate is being used as an intermediate monetary policy target. Owing to the interest parity condition, short term fluctuations in money market rates can have a direct influence on the spot rate. Thus, shocks affecting banks’ demand for central bank money could, in the case of monetary base targeting, lead to erratic interest rate movements and hence to destabilizing capital flows and disruptive exchange rate fluctuations. It is obvious that a perfect control of short term interest rates is required. On the other hand, monetary base targeting is clearly superior to interest rate targeting when a central bank has decided to adopt nominal GDP targeting. In this case, interest rate targeting could lead to undesirable fluctuations in the monetary base. The choice is less obvious when a central bank follows the rule of monetary targeting. Although monetarists often show a preference for monetary base targeting, it can be demonstrated that it is