Choosing a Monetary Aggregate: Another Look

The Shadow Open Market Committee has traditionally summarized its monetary-policy advice in a recommended rate of growth of the monetary base. However, since the Shadow Open Market Committee meeting in the spring of 1991, our recommendation has deemphasized the base because rapid growth in currency arising from liberalization in Eastern Europe and the Soviet Union distorted the data. Instead of the base, we have couched our recommendation in terms of M2, but our discussions of the issue of the choice of an aggregate target have been brief. My purpose here is to begin a reexamination of this issue. I say "begin" because the issue is a large and complicated one requiring more research than I could complete at this time; we will almost certainly want to revisit the subject in the future. The need for this review is well-illustrated by recent growth rates of the aggregates. Expressing growth at a continuously compounded rate, over the twelve months ending in July 1991 the St. Louis base grew by 8.61 percent, Ml by 5.87 percent, and M2 by 2.86 percent. By past standards, base growth suggests that monetary policy may be too expansionary, Ml growth seems about right (or perhaps a tad high), and M2 growth seems too low. Policymakers must, if only by default, form a view on which policy implication is correct. The Shadow Open Market Committee should also come to a view on which policy implication is correct and, if possible, use the current experience to refine our position on what aggregate is likely to be most reliable in the future