some time to tabulate, so just like the interest rate targets, the initial figures we have available to us are not as accurate as the follow up data two weeks or a month later. The other difficulty with measuring the monetary aggregate is deciding which one to actually measure. Deregulation and financial innovations can affect the way M1 or M2 react to changes in the Fed’s policy tools. A decision needs to be made concerning which aggregate is more effective as an estimator of the Fed’s ability to achieve its goals. Also, as people shift their wealth out of assets comprising the chosen monetary target and into new financial products that are not included in the aggregate, the characteristics of the monetary aggregate are now changed. The ranges of acceptable levels of M1 or M2 must be continuously adjusted to reflect this change.Controllability – When deciding whether interest rates or monetary aggregates are more appropriate as an intermediate target, the Fed needs to asses how well each can be controlled by its monetary policy tools. The Fed generally has significant control over both interest rate targets and monetary targets. The Fed can use open market operations, and to a lesser extent, changes to the discount rate or reserve requirements, to create the planned change to the federal funds rate, and subsequently to the market interest rates. Although control is quite effective it cannot be absolute because there are other factors and participants in the economy which the Fed cannot control. For example, although the Fed may lower the discount rate or its reserve requirements, it cannot force the banks to borrow from the discount window or use its excess reserves to make new loans. Likewise, although the Fed can use OMO to manipulate the market interest rate, it cannot directly control nominal rates since it cannot so easily adjust the public's view of expected inflation. The control the Fed exerts over ...
