Indicators of monetary policy: an evaluation of five

The paper is concerned with the question of the appropriate variable that the central bank should use to measure its influence on aggregate demand. More specifically, in the pursuit of its goal to stabilise the economy, what should be the indicator of monetary policy - a price variable such as a market interest rate or a quantity variable such as the growth in the money supply? This question is of interest as the monetary indicators or “guide” variables frequently appear to give conflicting signs with respect to the direction of influence of the monetary policy actions on the economy. The author evaluates the performance of five monetary indicators: a short term market rate of interest, a monetary full employment rate of interest, the money supply, the neutralised money supply and the monetary base. The current popular monetary policy indicators are first statistically reexamined, before he criteria used to evaluate the indicators are defined. The estimation procedure employed is then indicated and the statistical results presented. The results suggest that the market rate of interest is the poorest indicator, while the observed money stock and the monetary base are the most reliable. JEL: E52, E58, E51