Informality and monetary policy:
an operational framework
Monetary theory is like a Japanese garden. It has esthetic unity born of variety; an apparent simplicity that conceals a sophisticated reality; a surface view that dissolves in ever deeper perspectives.
M. Friedman (1969)
In the previous chapter, various informal aspects of Japanese economic policy were discussed. In general, economic policy can be divided into fiscal policy, monetary policy and various structural policies such as labour-market policy and industrial policy. This chapter presents an operational framework for the analysis of informal aspects of Japanese monetary policy. First, monetary policy and the monetary policy process will be discussed in section 4.2. Second, the main elements of monetary policy will be investigated from an informal perspective (4.3). Finally, these findings will be integrated with the results of the discussion of informal aspects of Japanese economic policy that were presented in chapter 3, and some conclusions will be drawn (4.4).
The basic conceptual framework for the analysis of the theory of economic policy and subsequently of the theory of monetary policy is due to Jan Tinbergen and Ragnar Frisch. Their target-instrument approach showed how policymakers could utilise policy instruments in order to achieve certain pre-specified policy targets (Petit 1990, p.5). Policy instruments are 'variables under the command of the government' (Tinbergen 1952, p.7), whereas the targets represent the ultimate goals of the policymakers. Following this framework, monetary policy can be defined as the deliberate manipulation of monetary policy instruments by the monetary policymakers, aimed at the realisation of their policy targets (Burger 1971).