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Summary

Monetary policy can be defined broadly as any policy relating to the supply of money. Since the main agency concerned with the supply of money is the nation's central bank, the Federal Reserve, monetary policy can also be defined in terms of the directives, policies, statements, and actions of the Federal Reserve, particularly those from its Board of Governors that have an effect on aggregate demand or national spending. The nation's financial press and markets pay particular attention to the pronouncements of the Chairman of the Board of Governors, the nation's central banker. The reason for this attention is that monetary policy can have important effects on aggregate demand and through it on real Gross Domestic Product (GDP), unemployment, real foreign exchange rates, real interest rates, the composition of output, etc. It is paradoxical, however, that these important effects, to the extent that they occur, are essentially only short-run in nature. Over the longer run, the major effect of monetary policy is on the rate of inflation. Thus, while a more rapid rate of money growth may for a time stimulate the economy leading to a more rapid rate of real GDP growth and a lower unemployment rate, over the longer run these changes are undone and the economy is left with a higher rate of inflation. In some societies where high rates of inflation are endemic, more rapid rates of money growth fail to exercise any stimulating effect and are almost immediately translated into higher rates of inflation. Traditionally, two means have been used to measure the posture of monetary policy. Since monetary policy involves the Federal Reserve's contribution to aggregate demand or money spending, it would be logical to examine the growth rate of the money supply. A growing money supply is important for the subsequent growth in money spending or aggregate demand. Giving empirical content to the abstract concept of "the supply of money" has not been easy. For the United States, three different collections of assets have been defined as "money" and labeled M1, M2, and M3. Unfortunately, over the period 1990-2001 these aggregates have grown at widely divergent rates, making it impossible to consistently characterize monetary policy. Alternatively, some economists and financial analysts have preferred to measure the posture of monetary policy by looking at interest rates, which they view as the price of money. Low and/or falling rates are taken as a sign of monetary ease; high and/or rising rates indicate monetary tightness. Unfortunately, since several other forces affect interest rates, caution is called for in measuring the Federal Reserve's contribution to aggregate demand by looking at interest rates. A basic but disconcerting conclusion from this discussion is that under current conditions, it is difficult in many instances to come to a meaningful judgment about the posture of monetary policy by looking at either the various measures of the money supply or interest rates. This report will be updated periodically as new data become available.

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