02294cam a22002417 4500001000600000003000500006005001700011008004100028100002300069245011600092260006600208490004100274500001600315520134100331530006101672538007201733538003601805700002001841710004201861830007601903856003701979856003602016w4304NBER20170221214106.0170221s1993 mau||||fs|||| 000 0 eng d1 aFeldstein, Martin.14aThe Use of Monetary Aggregate to Target Nominal GDPh[electronic resource] /cMartin Feldstein, James H. Stock. aCambridge, Mass.bNational Bureau of Economic Researchc1993.1 aNBER working paper seriesvno. w4304 aMarch 1993.3 aThis paper studies the possibility of using the broad monetary aggregate M2 to target the quarterly rate of growth of nominal GDP. Our findings indicate that the Federal Reserve could probably guide M2 in a way that reduces not only the long-term average rate of inflation but also the variance of the annual rate of growth of nominal GDP. An optimal M2 rule, derived from a simple VAR, reduces the mean ten-year standard deviation of annual GDP growth by over 20 percent. Although there is uncertainty about this value because of both parameter uncertainty and stochastic shocks to the economy, we estimate that the probability that the annual variance would be reduced over a ten year period exceeds 85 percent. A much simpler policy based on a single equation linking M2 and GDP is shown to be almost as successful in reducing this annual GDP variance. Additional statistical tests indicate that M2 is a useful predictor of nominal GDP. Moreover, a battery of recently developed tests for parameter stability fails to reject the hypothesis that the M2 - GDP link is stable, but the MI - GDP and monetary base - GDP relations are found to be highly unstable. This evidence contradicts those who have argued that the M2 - GDP relation is so unstable in the short run that it cannot be used to reduce the variance of nominal GDP growth. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web.1 aStock, James H.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w4304.4 uhttp://www.nber.org/papers/w430441uhttp://dx.doi.org/10.3386/w4304