The Formulation of Monetary Policy

25 Pages Posted: 24 Aug 2012

See all articles by Robert L. Hetzel

Robert L. Hetzel

Federal Reserve Banks - Federal Reserve Bank of Richmond

Date Written: May 1, 1984


The purpose of this paper is to elucidate the way in which current institutional arrangements shape the character of monetary policy. It is emphasized that the Fed, in order to preserve its independence, formulates monetary policy in a way that prevents the formation of coalitions within the government that could threaten its independence. As a consequence, the Fed, in general, attempts to balance multiple, changing objectives. This attempt leads to the demand for "flexibility," an absence of precommitment. Much of the paper is devoted to a discussion of the way in which the Fed's desire to avoid precommitment influences its use of analytical procedures for formulating policy and its use of money supply targets.

Suggested Citation

Hetzel, Robert L., The Formulation of Monetary Policy (May 1, 1984). FRB Richmond Working Paper No. 84-2, Available at SSRN: or

Robert L. Hetzel (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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