Abstract
A FREQUENTLY POSED QUESTION in monetary policy formulation concerns the choice of which money supply to focus on. Usually one of two alternative choice critena is advocated. Some economists advocate a particular money supply definition on the grounds that it has a stable velocity function that is, the linkage between the chosen money supply and nominal GNP is very predictable. 1 Others favor choosing the money supply that is most easily controllable that is, which has the most predictable linkage to the directly controlled monetary base.2 What these viewpoints have in common is the assertion that it is appropriate to focus on one best version of the money supply. They argue that the base should be set to try to achieve a target value of that money supply and should be adjusted in response to surprise deviations of that money supply in order to restore the original target value. This paper, by contrast, shows that in general it is suboptimal to focus on one money supply alone. Deviations of either M1 or M2 from their expected values
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