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Base drift and the longer run growth of M1 : experience from a decade of monetary targeting

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  • Alfred Broaddus
  • Marvin Goodfriend

Abstract

The Federal Reserve has been announcing target ranges for the growth of M1 and other monetary aggregates since 1975. In “Base Drift and the Longer Run Growth of M1: Experience from a Decade of Monetary Targeting,” Alfred Broaddus and Marvin Goodfriend discuss a technical aspect of the Fed’s monetary targeting procedure known as “base drift.” Base drift refers to the Fed’s practice of using the actual dollar level of an aggregate in the base quarter as the base level for the target range, rather than the midpoint of the targeted range set in the preceding period. Broaddus and Goodfriend estimate the cumulative impact of base drift on the effective growth of M1 since 1975 and indicate several ways in which base drift undermines the Fed’s present monetary targeting strategy. Net base drift was substantially upward over the 1975-1984 period. Further, since there has been both upward and downward base drift during the period, the cumulative drift tends to understate the quantitative significance of base drift on a year-to-year basis. Although in retrospect some part of the cumulative drift that occurred in 1982-1983 may have been fortuitous in the sense that inflation has remained low through 1984, the authors argue that the routine allowance of base drift greatly reduces the disciplinary features of monetary targeting and therefore probably reduces its effectiveness and credibility. Finally, they suggest two modifications of the present procedure that would eliminate base drift and in their view increase the public’s confidence in the Fed’s commitment to restore and maintain price stability.

Suggested Citation

  • Alfred Broaddus & Marvin Goodfriend, 1984. "Base drift and the longer run growth of M1 : experience from a decade of monetary targeting," Economic Review, Federal Reserve Bank of Richmond, issue Nov, pages 3-14.
  • Handle: RePEc:fip:fedrer:y:1984:i:nov:p:3-14:n:v.70no.6
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    References listed on IDEAS

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    1. William Poole, 1976. "Interpreting the Fed's Monetary Targets," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(1), pages 247-260.
    2. Marvin Goodfriend, 1982. "A model of money stock determination with loan demand and a banking system balance sheet constraint," Economic Review, Federal Reserve Bank of Richmond, issue Jan, pages 3-16.
    3. repec:mes:challe:v:18:y:1975:i:5:p:37-44 is not listed on IDEAS
    4. Stephen H. Axilrod, 1985. "U.S. monetary policy in recent years: an overview," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 14-24.
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    Cited by:

    1. Bennett T. McCallum, 2002. "Recent developments in monetary policy analysis: the roles of theory and evidence," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 67-96.
    2. Lucas, Robert E. & Nicolini, Juan Pablo, 2015. "On the stability of money demand," Journal of Monetary Economics, Elsevier, vol. 73(C), pages 48-65.
    3. Bordo, Michael D. & Choudhri, Ehsan U. & Schwartz, Anna J., 1990. "Money stock targeting, base drift, and price-level predictability : Lessons from the U.K. Experience," Journal of Monetary Economics, Elsevier, vol. 25(2), pages 253-272, March.
    4. R. W. Hafer, 1999. "Against the tide: Malcolm Bryan and the introduction of monetary aggregate targets," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 20-37.
    5. Dotsey, Michael & Hornstein, Andreas, 2003. "Should a monetary policymaker look at money?," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 547-579, April.
    6. Peter N. Ireland, 1993. "Price stability under long-run monetary targeting," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 25-46.
    7. Marvin Goodfriend, 1997. "Monetary policy comes of age: a 20th century odyssey," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 1-22.
    8. Michael Dotsey & Jed L. DeVaro, 1995. "Was the disinflation of the early 1980's anticipated?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 41-60.
    9. Weise, Charles L., 2009. "Political Constraints on Monetary Policy During the U.S. Great Inflation," MPRA Paper 18700, University Library of Munich, Germany.
    10. Edward Nelson, 2012. "A Review of Allan Meltzer’s A History of the Federal Reserve, Volume 2," International Journal of Central Banking, International Journal of Central Banking, vol. 8(2), pages 241-266, June.

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    Keywords

    Monetary policy;

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