essary to decide upon an appropriate intermediate target to track. This means we must choose between a monetary aggregate or interest rate. During the period from 1979 to 1982, the Fed focused on monetary aggregates as intermediate targets. Paul Volcker was chairman of the Board of Governors of the Federal Reserve system at this time and decided that this was the best method of tracking progress toward his goal of combating inflation. In 1982, the Fed began to shift away from monetary aggregates and focus more closely on interest rates. The argument at this time was that M1 had become less relevant as a measure of the money supply due to recent deregulation and financial innovations. In 1993, this shift continued and Alan Greenspan announced that both M1 and M2 would no longer be used as targets to guide monetary policy, but that reliance would instead be shifted to interest rate targets. The necessity of making this transition can be understood by examining how each intermediate target stacks up against the three criteria by which we judge the effectiveness of an intermediate target.Measurability – Both interest rate targets and monetary aggregates can be measured effectively and within a reasonable amount of time. Interest rates can even be tracked on a real-time basis. This instantaneous access to data does not necessarily guarantee an equal level of accuracy however, as these real-time interest rates are actually nominal rates and what is of concern to the Fed are real interest rates. It takes time to collect the data necessary to convert a nominal rate into a pertinent real rate, making interest rate targets less effective in the short-term than the long-term. Still, the data is effective and useful as long as we remember to consider its shortcomings and compensate accordingly. Monetary aggregates also have a short lag time – approximately two weeks for initial data. Some of the components of M1 or M2 take ...
