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In Defense of Base Drift

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  • Walsh, Carl E

Abstract

The 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 Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 76 (1986)
Issue (Month): 4 (September)
Pages: 692-700

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Handle: RePEc:aea:aecrev:v:76:y:1986:i:4:p:692-700

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Cited by:
  1. Chan Huh, 1995. "Interest rate smoothing and inflation, then and now," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct13.
  2. Jon Faust & Lars E.O. Svensson, 1999. "The equilibrium degree of transparency and control in monetary policy," International Finance Discussion Papers 651, Board of Governors of the Federal Reserve System (U.S.).
  3. Nathan S. Balke & Kenneth M. Emery, 1993. "The algebra of price stability," Research Paper 9309, Federal Reserve Bank of Dallas.
  4. Carl E. Walsh, 1987. "The Impact of Monetary Targeting in the United States: 1976-1984," NBER Working Papers 2384, National Bureau of Economic Research, Inc.
  5. Kenneth D. West, 1987. "On the Interpretation of Near Random-Walk Behavior in GNP," NBER Working Papers 2364, National Bureau of Economic Research, Inc.
  6. Michael D. Bordo & Ehsan U. Choudhri & Anna J. Schwartz, 1989. "Money Stock Targeting, Base Drift and Price-Level Predictability: Lessons From the U.K. Experience," NBER Working Papers 2825, National Bureau of Economic Research, Inc.
  7. Boschen, John F. & Mills, Leonard O., 1995. "Tests of long-run neutrality using permanent monetary and real shocks," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 25-44, February.
  8. Benjamin M. Friedman & Kenneth N. Kuttner, 1989. "Money, Income and Prices After the 1980s," NBER Working Papers 2852, National Bureau of Economic Research, Inc.
  9. Philip A. Nuetzel, 1987. "The FOMC in 1986: flexible policy for uncertain times," Review, Federal Reserve Bank of St. Louis, issue Feb, pages 15-29.
  10. Peter Ferderer, J., 1998. "The determinants of monetary target credibility," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(4), pages 825-841.
  11. J. Peter Ferderer, 1999. "The Credibility of the Federal Reserve's Monetary Targets," Macroeconomics 9903006, EconWPA.
  12. Ben Bernanke & Frederic Mishkin, 1992. "Central Bank Behavior and the Strategy of Monetary Policy: Observations from Six Industrialized Countries," NBER Chapters, in: NBER Macroeconomics Annual 1992, Volume 7, pages 183-238 National Bureau of Economic Research, Inc.

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