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