Short-Run Variations in the Money Stock

Abstract

* We would like to thank Esmond Adams, Helen Farr, Edward Fry, Charles Lieberman, Richard Marcis, Thomas Mayer, William Poole, Richard Puckett, V. Kerry Smith, Helmut Wendel and an anonymous referee for helpful comments on earlier drafts of this paper, and Lauren Dillard and John DuBois for invaluable research assistance. The views expressed in this paper do not necessarily reflect those of anyone in the Federal Reserve System. 1 While monetary researchers have frequently alluded to several of the points raised in this paper, until recently only Kaminow [16] and Poole and Lieberman [26] have actually examined any of the issues surrounding the quality of the money stock data. In early 1974, however, the Board of Governors of the Federal Reserve System announced the formation of a special committee of prominent academic experts to review the statistics on the monetary aggregates. The report of this committee was published in the spring of 1976 [27] and their discussion of the issues where applicable to this paper is presented below. identify and adjust for seasonal variation obscures important issues underlying cyclical and seasonal movements in time series. In addition, the results of frequency domain and time domain tests are presented which support the view that present adjustment techniques produce a distorted seasonally adjusted series. It is suggested that correcting such distortions will require a structural model of seasonality similar to those commonly used to investigate cyclical relationships among series. While the focus of this paper is on the money stock series, many of the issues discussed, distortions identified, and solutions offered, have general applicability. A major implication of our findings is that the confluence of seasonal and cyclical forces operating on short-run movements (month-to-month, and quarter-to-quarter) in key published series, such as the seasonally adjusted money stock, may often generate misleading signals for those trying to evaluate the thrust of policy and the pace of economic activity.