The Target Problem As Seen "On the Inside"

As a long-term participant in the discussion of targets and indicators of monetary policy, I want to take the opportunity presented by the appearance of a book on Federal Reserve operating procedures [1] written by "insiders" to look at the progress they have made, or failed to make, in developing an analysis of operating procedures. It is now almost eight years since Karl Brunner and I [2] tried to disentangle the several functions of free reserves or short-term interest rates in the Federal Reserve1s descriptions of policy actions and operations. At the time,we identified three main functions which we named the target, indicator, and causal role of free reserves. In later work, we attempted to formalize our analysis.