Academic journal article Federal Reserve Bank of St. Louis Review

A Reconstruction of the Federal Reserve Bank of St. Louis Adjusted Monetary Base and Reserves

Academic journal article Federal Reserve Bank of St. Louis Review

A Reconstruction of the Federal Reserve Bank of St. Louis Adjusted Monetary Base and Reserves

Article excerpt

This paper summarizes the results of a benchmark reconstruction of the adjusted monetary base and adjusted bank reserves data of the Federal Reserve Bank of St. Louis. With this revision, these series include monthly figures from December 1917 to the present and biweekly figures from February 1984 to the present. (1) During the reconstruction process, we reviewed the historical data used to measure the monetary base and the reserve adjustment magnitude (RAM), as well as the methods of construction for the series. Although all values of the series have changed, the principal changes are as follows:

* Monthly figures on both the adjusted monetary base and adjusted reserves now begin in December 1917. Previously, the adjusted monetary base began in 1936 and adjusted reserves began in 1980. (2) Biweekly figures on the adjusted monetary base and adjusted reserves begin in February 1984, when the Federal Reserve shifted from lagged to near-contemporaneous reserve accounting and lengthened reserve maintenance periods to 14 days from 7 days.

* Figures for the monetary (source) base have changed for January 1959 to December 1990. The revised figures are monthly averages of daily figures for currency in circulation and for deposits held by depository institutions at Federal Reserve Banks. Previous figures for this interval were pro rata monthly averages of 7-day or 14-day averages of daily figures. With this change, the monthly monetary base is measured consistently throughout its range as the average of daily figures. Differences between the revised and previous figures are small, typically less than $50 million.

* Figures for the RAM from September 1935 to October 1980 have been changed to correct calculation errors. The changes are discussed in detail below.

* As of January 1994, the previously published RAM was replaced with the Anderson and Rasche (2001) adjustment that interprets a bank's implementation of a retail-deposit sweep program as being equivalent to a reduction in its statutory reserve requirement. This change increases the adjusted monetary base and adjusted reserves by approximately $18 billion as of the reserve maintenance period that ended on September 30, 2002.

THE ROLE OF THE MONETARY BASE IN MONETARY POLICY

It is commonplace today for monetary policy analysis, both in theory and practice, to be conducted without reference to the monetary base or other monetary aggregates. (3) Given this shift in monetary policy analysis, some readers of this article may question the value of reconstructing the St. Louis measure of the adjusted monetary base. We briefly address that question here. (4)

In a recent paper, Nelson (2002b) attributes the omission of monetary aggregates, at least in part, to the intellectual influence of Taylor (1993) and subsequent related research. For near-term policymaking, Taylor's analysis succinctly combined policymakers' concerns regarding deviations of both inflation and gross domestic product (GDP) from desired target levels, while relegating money supply and demand to an invisible background role.

Recent analyses suggest two roles for the monetary base in policymaking. The first focuses on the long-run implications of monetary base growth for the price level and inflation rate. These authors argue that the truth of Milton Friedman's proposition--"inflation is always and everywhere a monetary phenomenon"--does not depend on whether a monetary aggregate appears in the central bank's policy reaction function. Rather, at least in the theoretical long run when the effects of other shocks have played out, the inflation rate is determined by the growth rate of money because, absent such growth, inflation could not continue. It matters not at all in the long run whether policymakers target interest rates or monetary aggregates for, so long as their actions permit the necessary increases in the central bank's balance sheet, inflation will follow. …

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