Nonmember Banks and Monetary Control: Reply

Abstract

Empirical evidence on (1) is provided in [2]. The key methodological issue is whether this evidence is sufficient for drawing any empirically-based inference about (2). Since COV(,B, 8) and VAR(8) are unobservable, empirical knowledge of (1) does not imply empirical knowledge of (2). This result is consistent with my position in [1, p. 312] that imposition of URR alters r* variability in a manner that does not necessarily bear any clear-cut relationship to the currently observed variability of r*N. An a priori relationship between (1) and (2) can however be acquired by adjoining additional behavioral hypotheses to (1)-(2). Two polar cases have been examined. In [3] it is assumed that , and 8 are identical random variables, implying that VAR(r*N) = VAR(r*U). In [1] I implicitly assumed that VAR(8) 0 so that VAR(r*N) > VAR(r*U). Thus (1) and (2) may bear many different a priori relationships, only one of which is correct empirically. The information in [2] is not, however, sufficient to distinguish among the alternative a priori relationships. Thus, the issue of Federal Reserve membership and money stock control is still an open empirical question.