##zation could push long - term rates to zero, there is no guarantee that will provide enough stimulus, given the prevailing deflation. the real bond rate could still be too high. this proxy role for money could, in principle, cover other channels besides long - term government and private interest rates and asset prices – such as liquidity and credit effects – that might be activated by increases in the money supply. in this case, even additional conventional operations – open market operations in treasury bills – might stimulate aggregate demand, even if they could not further lower the short - term nominal interest rate. however, that affect does not seem very plausible. for example, would the increased liquidity of holding money versus short - term bills stimulate aggregate demand? if economic agents wanted the additional liquidity they could have acquired it with no holding cost by selling zero - interest - rate bills and acquiring cash. why, when the central bank initiates this change, would it affect spending, if no interest rates or asset prices were affected? bernanke and gertler have emphasized a credit channel as part of the transmission mechanism. but this channel – though amplifying the effect of monetary policy – seems itself to require a change in interest rates. for example, a decline in interest rates would, according to bernanke and gertler, reduce existing committed cash flows of borrowers and therefore make the borrower more creditworthy. this, in turn, could result in lenders offering additional credit. however, if interest rates do not decline this channel is not activated. finally, the proxy role for money could include the effect of monetization on expectations. this channel depends on the ability of policymakers to alter expectations about the course and effects of future policy. that is, the policy effect does not derive from a higher money supply today but from a perceived commitment to a higher money stock in the future. expectation effects could alter current long - term real interest rates in two ways. first, convincing the public that monetary policy will remain stimulative longer will lower expected future nominal short - term interest rates and therefore longer - term nominal interest rates. second, convincing the public that monetary policy will achieve a higher inflation rate in the future, at least on average, could lower bernanke and gertler ( 1995 ). clouse et al. ( 2000 ). i am assuming a standard expectations theory of the term structure of interest rates and constant risk premiums. long - term interest rates are,

not set an explicit numerical inflation target. it might be more appropriate for the congress, presumably with input from the fed, to set such a target given that the congress is responsible for setting the broad objectives for monetary policy. at any rate, the upside or downside of publicly reporting a reference value is that the fomc would have to be more explicit about its objectives. to calibrate my reference value, i provide the staff with my personal inflation target. for the chain gdp price measure, the appropriate choice in the equation of exchange, my inflation target is 1 - 1 / 2 percent. i allow 1 / 2 percent for measurement error and add an additional 1 percentage point as a " cushion, " in light of the potential deterioration of cyclical performance in economies operating at very low inflation rates. this would be consistent with a 1 - 1 / 2 percent target for the personal consumption expenditure measure of consumer prices and about a 2 percent target for the consumer price index, based on recent experience with the differentials among these alternative measures of inflation. finally, we consider whether adjusting the m2 reference value for a systematic trend in v2 velocity is appropriate. before the velocity shifts of the early 1990s, there seemed to be a long - standing, small, but positive, trend in v2. the pattern is no longer clear. of course, the velocity shift in the early 1990s was, at least at the beginning, unexpected and unexplainable. for the reference value to be informative, adjustments for shifts of velocity would be necessary, and the ability to detect such shifts in " real time " is a potential problem. at this point, we assume that trend growth in v2 is zero. bringing all the steps together, my resulting reference value for m2 growth is 5 percent to 5 - 1 / 2 percent, the sum of my inflation target and my estimate for trend growth. given the uncertainty about some of the inputs to the calculation, we might end up with a narrow range, as opposed to a point. the next issue is how to effectively make use of the reference value. the purpose of the reference value, in my view, is not to read short - run deviations from it as signals of the need for adjustments in policy. the short - term variability in velocity makes the extraction of such a signal too difficult. instead, the purpose of the reference value is to provide a check that might help avoid significant and persistent errors that undermine the fed's medium - term inflation