ABSTRACT
This chapter discusses the challenges in conducting monetary policy in the 1990s—now that the monetary aggregates have proved unreliable. The real interest rate is appealing because it has a direct effect on business and household spending decisions. The defense cuts and other deficit-reducing measures in the US are important factors that have restrained aggregate demand and slowed economic growth. And for the last few years, economic activity in our major trading partners has been lackluster, or worse. The problem with nominal gross domestic product approach is that it does not respond to policy actions as quickly as money did, though the lag is shorter than the inflation lag. So with this approach, policymakers would have a guide for responding to actual recent data on aggregate demand and have more confidence that they would hit their inflation target in the long run.
