Central banks have not always conducted monetary policy in the same way. Although most of the world’s central banks now use interest rates as the primary monetary policy tool, prior to the 1990s they used control of monetary aggregates. In other words, central banks would set the stock of money, and the cost of money was ultimately determined by the market based on the liquidity needs in the economy at that point in time. Later, central banks gradually adopted inflation-targeting frameworks based on interest rate setting, where the stock of money is determined by the market. The inflation-targeting frameworks proved more successful in maintaining price stability.
