We offer some empirical evidence on the likely scale of control and indicator problems surrounding alternative monetary targets and a direct inflation target. The links between monetary policy actions and inflation are estimated in dynamic linear models using the Kalman filter. We compare alternative intermediate-target and final-target monetary strategies using German data from the end of the Bretton Woods system until 1997. The estimation results show that broad money dominates narrow money as an intermediate target, while control problems involved in targeting broad money are larger than for direct inflation targets. Copyright Verein fü Socialpolitik and Blackwell Publishers Ltd 2001.

The experience with the two pillar strategy of the European Central Bank (ECB) suggests that at some point in the future the ECB may have to commit to one of the more traditional policy strategies - a direct inflation target or an intermediate monetary target. This study offers some information on the scale of control and indicator problems associated with both strategies. We estimate the links between monetary policy actions and inflation in dynamic linear models with the Kalman filter. Using European M3 that the ECB has published, it is found that the overall control problems involved in targeting money are larger than for direct inflation targets.

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