ago. It is the object of this paper to examine some implications of these two regulations for the control of the money supply via reserve aggregates, To control the money supply (M 1 or other aggregate) using reserves, it is necessary to have an idea of the pattern by which changes in the reserve instrument affect changes in the money supply target. That is, one must have a model (perhaps implicitly) of the money supply, which would generally include an estimated response-path of the aggregate to changes in the reserve instrument, from which to make forecasts of that aggregate, conditioned on choices of instrument values. Accuracy of control is limited by accuracy of our forscasts, which in turn is limited by the appropriateness of the model. Thus model specification is of paramount importance in control. In the next section it is shown that a single-equation model, which relates a monetary aggregate including member bank deposits to present and past values of a reserve instrument, is of necessity misspecified if that instrument* contains required reserves as a component-basically because current deposits are then associated with future reserves. Thus, for example, multipliers derived from such equations are inconsistent. This leads to a consideration of reserve series, such as free reserves, obtained by eliminating the predetermined required reserve series from the reserve instrument. To examine the effect of lagged vault cash on money supply/reserve relationships, Section 3 describes various reserve series, obtained by substituting current for lagged vault cash in the reserve aggregate. This concept is then integrated with that of Section 2 by developing some contemporaneous marginal reserve and base measures, which take into account both aspects of lagged accounting.

Seasonally adjusted monetary aggregate data as published by the Federal Reserve, are subject to large revisions, which can be interpreted as error in the preliminary measures. Since short-run monetary policy is set for seasonally adjusted data when only preliminary estimates for recent months are available, an interesting question is: Would policy have been much different if final data had been available? For the period of the seventies, we estimate what would have been the monthly Federal Open Market Committee targets for Ml and the federal funds rate if the preliminary estimate of the rate of growth of seasonally adjusted Ml had been equal to the final one. We find that, despite their large size, revision errors seem to have little impact on the setting of targets. The results suggest that the Fed reacts to a signal in the rate of growth of Ml which is smoother than the seasonally adjusted series and less affected by revisions. Since the error associated with the revision is orthogonal to the preliminary measurement, while the noise extracted is orthogonal to the true variable (the signal), the analysis illustrates the different effects of the two alternative error-in-variable specifications.

David A. Pierce, Darrel W. Parke, William P. Cleveland, Agustin Maravall, Uncertainty in the Monetary Aggregates: Sources, Measurement and Policy Effects, The Journal of Finance, Vol. 36, No. 2, Papers and Proceedings of the Thirty Ninth Annual Meeting American Finance Association, Denver, September 5-7, 1980 (May, 1981), pp. 507-515