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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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  • Walsh, Carl E, 1986. "In Defense of Base Drift," American Economic Review, American Economic Association, vol. 76(4), pages 692-700, September.
    • Handle: RePEc:aea:aecrev:v:76:y:1986:i:4:p:692-700
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    Cited by:

    1. Peter Ferderer, J., 1998. "The determinants of monetary target credibility," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(4), pages 825-841.
    2. Faust, Jon & Svensson, Lars E O, 2002. "The Equilibrium Degree of Transparency and Control in Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 520-539, May.
    3. 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.
    4. Peter J. Stemp, 1991. "Optimal Weights in a Check‐List of Monetary Indicators," The Economic Record, The Economic Society of Australia, vol. 67(1), pages 1-13, March.
    5. 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.
    6. J. Peter Ferderer, 1999. "The Credibility of the Federal Reserve's Monetary Targets," Macroeconomics 9903006, University Library of Munich, Germany.
    7. Hetzel, Robert L., 1995. "Why the price level wanders aimlessly," Journal of Economics and Business, Elsevier, vol. 47(2), pages 151-163, May.
    8. West, Kenneth D, 1988. "On the Interpretation of Near Random-walk Behavior in GNP," American Economic Review, American Economic Association, vol. 78(1), pages 202-209, March.
    9. 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.
    10. Gordon, David B. & Leeper, Eric M. & Zha, Tao, 1998. "Trends in velocity and policy expectations," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 265-304, December.
    11. 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.
    12. Carl E. Walsh, 1987. "The impact of monetary targeting in the United States, 1976-1984," Working Papers in Applied Economic Theory 87-04, Federal Reserve Bank of San Francisco.
    13. Daniels, Joseph P. & VanHoose, David D., 1995. "Monetary policies in interdependent economies: an open economy explanation for base drift and price-level non-trend-stationarities," Journal of International Money and Finance, Elsevier, vol. 14(2), pages 275-287, April.
    14. Benjamin M. Friedman & Kenneth N. Kuttner, 1989. "Money, Income and Prices After the 1980s," NBER Working Papers 2852, National Bureau of Economic Research, Inc.
    15. Chan Guk Huh, 1995. "Interest rate smoothing and inflation, then and now," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct13.

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