This paper examines the impact of several different factors on the credibility of the Federal Reserve's monetary targets. Two factors appear to explain why the targets became less credible during the 1980s. First, the Fed's shift from M1 to M2 targets reduced credibility because the latter...

In the 1970s the Federal Reserve began a policy of targeting monetary growth. Those who viewed this as a positive development felt that such a policy would allow the Fed to signal its intentions to be firm in its pursuit of an anti-inflationary agenda. Moreover, if the Fed could pursue its...