In Defense of Base Drift
AbstractThe Federal Reserve has been criticized for allowing the base from which it calculates its target growth paths for the monetary aggregatesto drift from year to year in response to past deviations from target.Drift in the base implies that target misses permanently affect the levels of the monetary aggregates. Using a simple theoretical model, this paper shows that the optimal degree of base drift consistent withprice stability depends on the importance of permanent versus transitory income and velocity disturbances. Neither zero base drift nor complete base drift are likely to be compatible with price stability. Copyright 1986 by American Economic Association.
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Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Review.
Volume (Year): 76 (1986)
Issue (Month): 4 (September)
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