TY - JOUR
AU - Feldstein, Martin
AU - Stock, James H
TI - The Use of Monetary Aggregate to Target Nominal GDP
JF - National Bureau of Economic Research Working Paper Series
VL - No. 4304
PY - 1993
Y2 - March 1993
DO - 10.3386/w4304
UR - http://www.nber.org/papers/w4304
L1 - http://www.nber.org/papers/w4304.pdf
N1 - Author contact info:
Martin S. Feldstein
President Emeritus
NBER 1050
Massachusetts Avenue
Cambridge, MA 02138-5398
Tel: 617/868-3905
E-Mail: msfeldst@nber.org
James H. Stock
Department of Economics
Harvard University
Littauer Center M26
Cambridge, MA 02138
Tel: 617/496-0502
Fax: 617/495-7730
E-Mail: James_Stock@harvard.edu
M1 - published as Martin Feldstein, James H. Stock. "The Use of a Monetary Aggregate to Target Nominal GDP," in N. Gregory Mankiw, editor, "Monetary Policy" The University of Chicago Press (1994)
AB - This 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.
ER -