Monetary and Economic Studies Vol.14, No.1 / July 1996

Styles of Monetary Management

Tommaso Padoa-Schioppa

Over the years,reflecting a growing consensus on the priority of price stability as the objective of central banks and on market-oriented techniques as the appropriate instruments for monetary control,the focus of the debate has gradually shifted to what can be called the style of monetary policy,or the way in which central banks should formulate and communicate their action to maximize its effectiveness.This paper is concerned with four styles of monetary management,three of which involve a formal,quantified and time-specific pre-commitment in terms of a single target variable: the exchange rate,the money supply and the rate of inflation.The fourth,which I shall call the "classic" style,relies instead on action,consideration being given to a multiplicity of variables.The experience of the Group of Seven countries in the last 25 years suggests that the styles actually practiced deviated in many instances from those formally announced and that the classic style has been,on the whole,the most widely adopted.Furthermore, a comparison of these countries' inflation performances shows that price stability can be successfully achieved through different styles and that a formal pre-commitment to a single target variable may not be as important in practice as it might appear in theory.Central banks should be aware that trying to influence market expectations by "speaking up before" may be useful but that the best way to win credibility is still through the results they achieve and the determination and consistency they show in their behaviour.

Keywords: Central banking;Styles of monetary policy

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 1996 Bank of Japan All Rights Reserved.

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