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FEDERAL RESERVE BAN K OF NEW YORK

279

The Business Situation
The progress of the economic recovery from last year’s
recession continues to be mixed. A year after the cyclical
trough, tentatively placed in November 1970, produc­
tion and employment remain sluggish by comparison
with the gains experienced in earlier recovery periods.
Indeed, the unemployment rate again inched up to 6.0
percent in November, as a rise in employment was
swamped by a large increase in the civilian labor force.
There have been some indications in recent months, how­
ever, that the momentum of the recovery may be quick­
ening. The level of gross national product (GNP) in the
third quarter has been revised upward by $1.8 billion
from the preliminary estimate.1 Retail sales rose strongly
over recent months. Moreover, these gains were widely
based and not confined to automotive demand, which had
risen markedly in part as a result of the proposed elimina­
tion of the automobile excise tax. After allowance for the
rundown of inventory stocks accumulated in anticipation
of a midsummer steel strike, manufacturers’ demand for
inventories appears to have strengthened. Residential
construction activity remains high and, according to recent
surveys, plant and equipment spending is slated to acceler­
ate somewhat over this year’s lethargic pace.
The impact of the ninety-day price freeze, which ended
on November 13, is most clearly apparent in the data on
wholesale prices. Indeed, wholesale industrial prices actu­

1 The revised third-quarter estim ate indicates that G N P increased
by $17.7 billion to a seasonally adjusted annual rate of $1,060.8
billion. The rate of increase in the im plicit G N P price deflator was
revised downward slightly to an annual rate of 3.0 percent. The
revised estimates indicate greater growth in real G N P — 3.9 percent
rather than 2.8 percent as originally reported. A m ong the major
contributors to the upward revision in current-dollar G N P were
residential construction and net exports. On the other hand, the
initially reported small rise in business inventories was revised
dow n by $0.5 billion to a $1.1 billion increase from the second
quarter. The preliminary estim ates o f corporate profits, released
along with the G N P revisions, reveal that after-tax corporate profits
slipped $0.2 billion during the third quarter to $45.8 billion at a
seasonally adjusted annual rate.




ally declined slightly over the three months that ended in
November. The response of consumer prices was less
dramatic, although technical factors complicate an assess­
ment of the precise impact of the freeze on consumer
prices. Looking to the future, price developments will
depend in part on the manner in which the wage and price
norms that were announced in November are applied. The
newly established Pay Board and Price Commission have
announced goals of holding overall increases in wages and
benefits to 5.5 percent and in prices to 2.5 percent an­
nually. The achievement of these goals in 1972 would
represent significant progress in the fight against inflation.
IN D U ST R IA L . P R O D U C T IO N , O R D E R S ,
A N D IN V E N T O R IE S

The Federal Reserve Board’s index of industrial pro­
duction inched up a scant 0.2 percent in October on a
seasonally adjusted basis. The increase in the overall
index was held down by a sharp drop in the output of coal
that resulted from the coal miners’ strike. Indeed, exclud­
ing the impact of that strike, the rise in industrial
output was relatively strong, as gains in production in
other industries were broadly based. Output of steel, cop­
per, industrial and commercial equipment, and consumer
goods increased. On the other hand, output of defense
equipment and some nondurable materials declined. By
October, total industrial production had risen 3.6 percent
above the November 1970 low but was still 0.8 percent
below the 1971 high reached in June and 5.0 percent
below the record peak attained in September 1969.
The flow of new orders received by durable goods man­
ufacturers rose modestly in October on a seasonally
adjusted basis. In fact, the series has been essentially flat
all year. Although, in the past, movements in new orders
have often foreshadowed changes in economic activity,
recent developments may have affected the usefulness
of this series as a forecasting tool. For example, confronted
with the price freeze and the uncertainties surrounding
Phase Two policies which were being formulated during

280

M ONTHLY REVIEW , DECEMBER 1971

October, buyers and sellers may have been reluctant to
make firm commitments. Nevertheless, new orders in the
critical producers’ capital goods sector rose in October to
a record $6.9 billion, according to preliminary figures.
Recent movements in manufacturers’ inventories have
been dominated by the rundown in steel stocks built up by
users in anticipation of a midsummer steel strike. Thus,
manufacturers’ inventories of materials and supplies—
measured on a seasonally adjusted book-value basis—
declined by nearly $0.5 billion between August and Oc­
tober, with much of this decline reflecting the liquidation
of excess steel stocks. Apart from materials and supplies,
however, inventory demand of manufacturers has strength­
ened. These firms’ inventories of finished goods and goods
in process increased by $1.0 billion between August and
October. According to the results of a recent Government
survey, moreover, manufacturers plan to expand their
inventories further over the balance of the year. Increased
inventory accumulation could well augment stronger final
demand in spurring economic activity in coming months.
This would be a major propellant for faster economic
growth, since the sluggishness of inventory spending has
been one of the most important factors in the slower than
usual pace of the recovery.
The strengthening in demand for inventories appears
to have extended to wholesale and retail trade estab­
lishments as well. The book value of wholesale and retail
trade inventories rose by a substantial $0.6 billion in Sep­
tember (the latest month for which data are available).
During the third quarter, total trade inventories increased
at a seasonally adjusted rate of $1.9 billion, up about $0.4
billion from the previous quarter. At the same time, inven­
tories at retail automotive outlets declined slightly. For
the most part the accumulations were about in line with
sales, and inventory-sales ratios remained at comfortable
levels.

year, slightly exceeding the 5 percent increase in capital
goods’ prices anticipated by the respondents to the survey.
In comparison, the results of the earlier Lionel D. Edie and
Co. survey indicated that businesses plan to spend 9
percent more on fixed investment goods while expecting
capital goods’ prices to rise 4.5 percent.
Although there are differences among the survey results
in some details, the surveys are in broad agreement over
the projected course of manufacturers’ expenditures for
plant and equipment. Whereas this spending component
has been distinctly sluggish in 1970 and 1971, all three
surveys foresee a substantial rise during the next few
months. Of course, how much of this planned spending
actually materializes will depend on how closely unfold­
ing economic developments match current business pro­
jections. One early sign that a pickup in manufacturers’
capital spending may be in the offing is the third-quarter
turnabout in capital appropriations made by manufac­
turers (see Chart I). After falling in the previous quarter,
net new appropriations increased some 14 percent in
the third quarter according to a Conference Board sur­
vey. While the volatility of this series argues against
attaching too much significance to short-run movements,
the increase is consistent with the outlook for manufac­
turers’ plant and equipment spending provided in the
other surveys.

C h a rt I

MANUFACTURERS’ EXPENDITURES A N D APPROPRIATIONS
FOR NEW PLANT A N D EQUIPMENT
C H A N G E FROM FOUR QUARTERS EARLIER

P L A N N E D IN V E ST M E N T S P E N D IN G

According to several surveys taken after President
Nixon outlined the new economic program on August 15,
businesses plan to step up their fixed investment outlays
in 1972. In a survey taken jointly by the Department of
Commerce and the Securities and Exchange Commission
in October and November, plant and equipment expendi­
tures during the first half of 1972 were projected to rise
9.1 percent above what they had been in the comparable
period of 1971. This estimated increase is consistent with
the results of private surveys covering the entire year. The
McGraw-Hill survey reported a 7 percent planned rise in
plant and equipment expenditures during the upcoming




Source: The Conference Board, Inc.

FEDERAL RESERVE BAN K OF NEW YORK

R E SID E N T IA L C O N ST R U C T IO N

281

C h a rt II

M ORTGAGE COMMITMENTS A N D RESIDENTIAL
CONSTRUCTION EXPENDITURES

Residential construction activity has continued to be a
C H A N G E FROM FOUR QUARTERS EARLIER
source of considerable economic strength. After dipping
in September, housing starts in October again edged above
the 2 million mark on a seasonally adjusted annual rate
basis— a shade below the record third-quarter average
of 2.1 million units. At the same time, newly issued build­
ing permits jumped nearly 17 percent in October to a
seasonally adjusted annual rate of 2.2 million units, an
all-time record. Since newly issued permits again exceeded
the number of housing starts, the backlog of units yet to
be begun rose in October, continuing its almost steady
growth of the past year or so.
The course of residential home building during coming
months will depend to some extent on developments in
the mortgage market. Since in most instances mortgage
commitments must be secured before construction financ­
ing can be arranged, the commitments series serves as an
Sources: Federal Home Loan Bank Board; S avings Bank A ssociation o f New
York State; U nited States D epartm ent o f Commerce, Bureau o f the Census.
advance indicator of construction activity (see Chart II).
In the third quarter, outstanding commitments of savings
and loan associations and mutual savings banks had risen
to record levels on a nonseasonally adjusted basis. More­
over, according to most indicators, conditions in the mort­
gage market have eased since then. It is true that the aver­ number of private housing starts receiving either a direct
age interest cost of conventional mortgages edged higher in or indirect Federal subsidy is estimated at about Vi mil­
September before leveling off in October. However, these lion units. It is unlikely that the number of subsidized
data are based on mortgage closings and thus reflect mar­ starts will decline next year, especially in view of the
ket conditions as much as several months earlier when the Government’s strong commitment to upgrade and en­
commitments were made. The more sensitive secondary large the stock of residential housing.
market yields of Federal Housing Administration-insured
loans declined in both September and October. A major
IN C O M E , C O N S U M P T IO N , A N D E M P L O Y M E N T
factor underlying this easing in the mortgage market
Compared with the $5.1 billion monthly average in­
appears to have been the relatively large declines in
interest rates on corporate bonds and United States Gov­ crease in personal income so far this year, the $0.8 billion
ernment securities. For example, the interest rate spread rise in October was minuscule. The increase was more
of conventional mortgages over Government securities than accounted for by a $1.3 billion increment in wage
with a maturity of ten years or more increased almost 60 and salary disbursements— this too being well below the
basis points between June and October, while the spread average growth of previous months. With wages frozen
between secondary FHA mortgages and long-term Gov­ and payroll employment practically unchanged in October,
ernment securities rose 34 basis points. Earlier in the the increase in wage and salary disbursements probably
year, when interest rates on these instruments were high stemmed largely from the longer workweek and increased
relative to those on mortgages, savings and loan associa­ overtime during the month.
Recent retail sales data support the view that con­
tions, and mutual savings banks had used portions of their
sizable savings inflows to acquire bonds and, in particular, sumers have become somewhat less hesitant. During the
to rebuild their liquidity positions. Recently, however, they five months that ended in October, nonautomotive retail
have begun to channel proportionately more of their sales increased at a seasonally adjusted annual rate of 8.3
percent. In comparison, over the first five months of the
inflows to the mortgage market.
The expanded presence of the Federal Government in year, nonautomotive sales had grown at an annual rate of
the private housing sector has contributed importantly only 3.5 percent. In view of the slowing in the rate of
to the 1971 housing boom. During the current year, the increase of consumer goods prices, the recent accelerated




282

M ONTHLY REVIEW , DECEMBER 1971

growth in nonautomotive retail sales is all the more signif­ which have begun to show some— admittedly scattered—
icant. After surging dramatically in August and September, improvements during recent months. After being virtually
the automotive component of retail sales fell slightly in unchanged during the first six months of 1971, civilian
October, according to preliminary estimates. This decline employment posted a substantial gain of 520,000 on aver­
may reflect seasonal adjustment difficulties associated with age in the third quarter, matched by an almost equal gain
the price freeze, inasmuch as unit sales of new domesti­ in the first two months of the current quarter. At the same
cally produced passenger cars were reported to have risen time, however, this employment growth has been largely
almost 8 percent in October. During the three months counterbalanced by an unusually big rise in the civilian
ended in November, these sales were running at a sea­ labor force, leaving the unemployment rate hovering at
sonally adjusted annual rate of 9.8 million units, an in­ 6.0 percent.
crease of nearly 17 percent over average sales in the earlier
Some tentative improvements in labor market condi­
months of 1971. Another indication of growing confidence tions can also be seen in the recent payroll survey data.
on the part of consumers can be seen in their willingness After remaining virtually flat during the first eight months
to increase their indebtedness. The average monthly in­ of the year, nonagricultural payroll employment increased
crease in consumer credit over the five-month period ended about 390,000 on a seasonally adjusted basis between
in October was nearly double that of the first five months August and November. The extent of the advance was held
down by the coal miners’ and East and Gulf Coast dock
of the year.
To some extent, the apparent shoring-up of consumers’ workers’ strikes, which were still in progress at the time of
confidence may be anchored in labor market conditions, the November survey. In the manufacturing sector, the
number of workers employed rose by 130,000 from Au­
gust to November. Part of this gain was accounted for by
the return of some steelworkers who had been laid off in
August after the threatened steel strike was averted. Tak­
C h a rt III
ing a longer perspective, the relatively slow pace of the
M A N U F A C T U R IN G EMPLO YM EN T IN FOUR
recovery from last year’s recession is clearly evident in
C O N TR AC TIO N S A N D RECOVERIES
manufacturing employment. During the year after the ten­
P erce nt
S e a s o n a lly a d ju s te d in d e x
P e rce n t
tatively identified recession trough of November 1970,
employment in manufacturing increased by only 0.4 per­
cent (see Chart III). In contrast, such employment had
posted gains ranging from 4.1 percent to 6.2 percent in
the three earlier post-Korean war recoveries.
P R IC E

N o te : The business-cycle tro u g h s, as id e n tifie d by the N a tio n a l Bureau of
Economic Research, are A u g u st 1954, A p ril 1958, F ebruary 1961, and
N o v e m b e r 1970 (tentative).
Source-. U nited States D epartm ent o f Labor, Bureau o f Labor Statistics.




DEVELOPM ENTS

The special circumstances surrounding the ninety-day
price freeze that ended on November 13 have made recent
movements in the consumer price index difficult to assess.
For example, prices of some commodities and services
were exempt from the freeze. Moreover, some items cov­
ered in the consumer price index are priced less frequently
than monthly so that numerous price changes are reflected
in the index with a lag. Even the practice of seasonal ad­
justment may produce misleading results when the cus­
tomary seasonal variations are not fully permitted. With
this in mind, the latest available data indicate that con­
sumer prices rose at a seasonally adjusted annual rate
of 1.6 percent in October, the smallest advance since
April 1967. On an unadjusted basis the index rose at a 2
percent annual rate in October, the same as in the preced­
ing month. The rate of increase in prices of nonfood com­
modities (not seasonally adjusted) was a large 5.1 percent

FEDERAL RESERVE BA N K OF NEW YORK

in October, the same as in the preceding month, and pri­
marily reflected higher prices for apparel and new cars,
including imports.
The price freeze apparently had a much greater effect
on wholesale prices than on consumer prices. After rising
sharply over the first eight months of 1971, wholesale
prices actually declined slightly between August and No­
vember. While prices of agricultural products which were

not subject to the freeze fluctuated widely, industrial
wholesale prices generally edged lower. These prices fell
at a seasonally adjusted annual rate of 1.3 percent be­
tween August and November, following their large in­
crease at an annual rate of 5.0 percent earlier in the year.
On an unadjusted basis, industrial wholesale prices fell
at an annual rate of 0.7 percent between August and
November.

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283

284

M ONTHLY REVIEW , DECEMBER 1971

The Money and Bond Markets in November
Interest rate movements were mixed in November. Most
money market rates continued the declines that had en­
sued upon President Nixon’s announcement on August 15
of new economic policies to restrain inflation while stimu­
lating the economy. The Federal Reserve Banks reduced
the discount rate by V\ percentage point to 43 percent
A
to bring it into closer alignment with other short-term rates.
The reduction by seven of the banks was approved by the
Board of Governors of the Federal Reserve System No­
vember 10, and by November 18 the other five had fol­
lowed suit. The effective rate on Federal funds dropped
steadily on a weekly average basis to a level about 3 per­
A
centage point below the level that had prevailed during
the first half of August, just before the President’s new
economic initiatives. Declining rates on commercial paper
triggered several reductions in the prime business loan
rates of the few banks that have tied their prime rates to
market rates. At the end of November, prime rates ranged
from X to % percentage point below the 6 percent level
A
of August. After posting declines early in November, a few
short-term rates reversed direction and closed higher for
the month although well below recent peaks. For example,
the three-month Treasury bill rate was still a full percentage
point below its late-July levels.
In contrast to most short-term rates, bond yields gen­
erally rose during November but still closed well below
the pre-August 15 levels. Dealers in all sectors of the
capital markets were burdened with unusually large in­
ventories as the month began. After some active selling
early in the month, dealers’ holdings swelled further as a
large flow of new issues encountered resistance amid
mounting investor concern over the outcome of the Phase
Two program to combat inflation. Yields on high-quality
utility bonds increased slightly over the month but were
still down about 60 basis points from the middle of August.
Yields backed up somewhat more in the tax-exempt sec­
tor but, because of earlier declines, closed about 67 basis
points lower than the mid-August levels, according to
The Weekly Bond Buyer's twenty-bond index. Yields on
Treasury securities also rose during November, but at the




month end still showed net declines from mid-August
averaging about 25 basis points on long-term bonds and
more than 100 basis points on intermediate-term issues.
THE MONEY MARKET

Although most short-term interest rates continued to
edge downward in November, the pace of the decline in
some cases was slower than in October, and there were
some reversals late in the month. Major banks’ offering
rates on large certificates of deposit (CDs) were un­
changed to V4 percentage point lower in November.
Bankers’ acceptance rates were reduced by a net Vs per­
centage point. Three-month Euro-dollar rates, which had
dropped from 10 percent in mid-August, slipped below
6 percent early in November. They rebounded to 7 per­
cent in the Thanksgiving holiday week, but retreated to
6 V2 percent by the end of the month.
Rates on most maturities of commercial paper declined
on balance over the month. For example, rates on dealerplaced 90- to 119-day paper fell from 5 Vs percent to
43 percent. Several banks are now tying their prime rate
A
to commercial paper rates according to various formulas.
One of these banks in New York City reduced its prime
rate four times over the month from 53 percent to 5X
A
A
percent, while another bank accomplished the same net
reduction in two steps. Most major banks that are still
administering the prime rate reduced it on November 4
from 53 percent to 5 V2 percent.
A
The effective rate on Federal funds continued to drop
steadily on a weekly average basis, declining from 5.11
percent in the statement week ended October 27 to 4.86
percent in the week ended November 24. The money mar­
ket suddenly tightened in that week, however, and the
effective rate on Federal funds rose from 43 percent
A
before the weekend to 5 Vs percent on the Wednesday
settlement date. That day member bank borrowings from
the Federal Reserve Banks surged to nearly $2.4 billion.
For the statement week as a whole, such borrowings
averaged $539 million, compared with an average of $209

FEDERAL RESERVE BA N K OF NEW YORK

C h a rt I

CHANGES IN MONETARY A N D CREDIT AGGREGATES
S e a s o n a lly a d ju s te d a n n u a l rates
P e rce n t

P ercent

25

20
15

10
5
0
-5

-1 0
1970

1971

N ote: D ata for N ovem ber 1971 are p re lim in a ry estimates.
M l - C urrency plus adjusted dem and deposits held by the public.
M 2 = M l plus com m ercial ba n k savings and time deposits held by the
p u b lic , less n e g o tia b le certificates o f de p o sit issued in d e n om inations
o f $100,000 or more.
A d ju s te d b an k c re d it p ro xy = Total member bank deposits sub je ct to reserve
requirem ents plus n o n d e p o s it sources o f funds, such as E uro-dollar
b o rro w in g s a nd the proceeds of com m ercial p a p e r issued by bank h o lding
com panies or oth e r a ffilia te s .
Source:

Board o f G overnors of the Federal Reserve System.

million during the three previous weeks (see Table I).
The tautness in the money market in the November 24
week, which occurred despite large injections of reserves
by the Federal Reserve, came as a surprise. It turned out
that reserve availability had been $400 million less on aver­
age during the week than had been thought. The error,
which was not discovered until after the end of the state­
ment period, resulted from a miscalculation of member
bank holdings of vault cash. Thus, net borrowed reserves
during the week averaged $344 million, whereas it had
been assumed that there were free reserves averaging $56
million.




285

The tight reserve positions were reversed in the follow­
ing statement week, and the Federal funds rate declined
day by day to an effective rate of 33 percent on December
A
1. The banks had to maintain their heavy November 24
level of borrowings through the Thursday holiday. As a
result, the member banks held an exceptionally large $558
million of excess reserves for the week, even though total
borrowings from the Federal Reserve were reduced to
$64 million by the closing day of the statement week.
The annual revisions in the money supply, based on new
benchmark data from the call reports of nonmember banks
for December 1970 and June 1971 and revised seasonal
factors, have been announced. Minor adjustments were
made in the data back through 1964.1 The revisions in the
1971 figures did not alter the basic pattern that had been
indicated by the unrevised figures of rapid growth in the
money supply in the six months ended in July and slow
growth or decline in each of the months since then (see
Chart I). The seasonally adjusted annual rate of growth
of M 1 over the six months ended in July was revised down­
ward slightly to 11.2 percent from 11.8 percent, while
the rate of decline for the succeeding three months was
revised to 0.5 percent from 1.4 percent. This brought the
annual growth rate of
over the six months ended in
October to a moderate 5.3 percent. According to prelim­
inary data, growth of M 1 resumed in November, albeit
at a modest rate of about 1 percent annually.
M2 grew at an annual rate of about IV 2 percent in No­
vember, reflecting continued strength in time deposits
other than large CDs. Revisions in the M2 series also were
generally small. M2 showed a pattern of very rapid
growth in the first part of the year followed by smaller
advances thereafter. In the case of M2, however, the
deceleration began earlier than it did for Mi. The slow­
down was more gradual, and the series has turned around
and risen moderately in the last two months as time deposits
have picked up renewed strength.
The growth rate of the adjusted bank credit proxy, re­
vised to take account of new seasonal factors, diverged
considerably from the rates of increase of M 1 and M2 in
November as it had in several months earlier this year. In
November, the growth of the proxy accelerated to a sea­
sonally adjusted annual rate of about 11 percent in spite
of weak demand deposit growth and a decline in large
CDs. A sharp advance in seasonally adjusted Govern-

1 Revised data are reported in the Federal R eserve Bulletin
(N ovem ber 1 9 71), pages 880-93.

286

MONTHLY REVIEW , DECEMBER 1971
Table I

TH E G O V E R N M E N T SE C U R IT IE S M A R K E T

FACTORS TENDING TO INCREASE OR DECREASE
MEMBER BANK RESERVES, NOVEMBER 1971
In millions of dollars; (4~) denotes increase
(—) decrease in excess reserves
Changes in daily averages—
week ended

Net
changes

Factors
Nov.

Nov.

Nov.

3

10

17

Nov.
24

— 413
4 - 122
4- 177
4 46
— 4
— 260

+ 419
—1,044
— 24
— 341
—
— 697
+

“ Market” factors
Member bank required reserves ..................
Operating transactions (subtotal) ..............
Federal Reserve float .................................
Treasury operations* ........ ........................
Gold and foreign account .........................
Currency outside banks .............................
Other Federal Reserve liabilities
and capital ...................................................

— 192
4- 630
+ 171
4- 357
4 - 22
4 - 167

—
—
—
44—

5
252
157

— 89

— 51

4- 163

+

42

Total “ market” factors ........................

4 - 438

— 257

— 291 -

625

-

735

+

57

— 68

4 539 +

590

4 1 .1 1 8

4 - 19

— 156

4 - 211

453

+

4-

4- 35

-f
+

4- 527
1
44- 83

+
8
— 197
+ 47

+
+
—
—
4-

4
444
—

...........................................................

— 93

— 129

4- 527 +

Excess reserves ...............................................

4- 345

— 386

+ 236 —

202

15
261

19

191
— 544
4- 167
4- 264
4- 33
—1,051

Direct Federal Reserve credit
transactions
Open m arket operations (subtotal) ..........
Outright holdings:
Treasury securities .................................
Bankers' acceptances .............................
Federal agency obligations ..................
Repurchase agreements:
Treasury securities ...............................
Bankers’ acceptances .............................
Federal agency obligations ..................
Member bank borrow ings...............................
Other Federal Reserve assetsf ....................
Total

1

—
4 . 29

—

i
40
14
2

94
33

+

5
48
234 +
13
28 +
167 +
179 —

6

—
93
24
26
250
265

4- 396
4- 51
4- 60
+ 12 G
— 364

574

4- 878

51

4- 144

Daily average levels

Monthly
averages

Member bank:
Total reserves, including vault cash ........
Required reserves .............................................
Excess reserves .................................................
Borrowings .........................................................
Free, or net borrowed ( —), reserves..........
Nonborrowed reserves .....................................
Net carry-over, excess or deficit (— ) § ___

30,961
30,565
396
216
180
30,745
40

30,580
30,570
10
122
— 112

30,458
222

31,229
30,759
30,983
30,564
246
195
289
539
— 43 — 344
30,220
30,940
76
54

30,882t
30,671$
212 t
292J
— SOJ
30,591+
98?

Note: Because of rounding, figures do not necessarily add to totals.
* Includes changes in Treasury currency and cash,
t Includes assets denominated in foreign currencies.
t Average for four weeks ended November 24.
§ Not reflected in data above.

ment deposits at commercial banks, along with an increase
in liabilities to foreign branches of United States banks,
contributed to the strength of the proxy advance.




The October rally in the Treasury securities market ex­
tended into the first few days of November. The ebullience
faded, however, as dealers emerged from the refunding2
with inventories of coupon issues at a record-high level.
In the face of declining prices, the auction by the Treasury
on November 9 of $2.75 billion of a fifteen-month note
received a less enthusiastic response than had been expected
at the time of its announcement. The average issuing yield
was about 4.91 percent, with bids accepted for yields as
high as 4.96 percent. The cut in the discount rate by seven
Federal Reserve Banks, announced November 10, did
little to buoy the market, inasmuch as the action had been
widely anticipated. The comments the next day by Chair­
man Burns of the Board of Governors that the Federal
Reserve System “intends to see that adequate bank re­
serves are provided to finance a vigorous, but sustainable,
expansion” helped to lend some strength to the market,
encouraging modest price increases in the following days.
The advances were short-lived, and by the Thanksgiving
holiday week prices were again moving downward. Large
additions to the supply of Federal agency issues and
Treasury bills weighed upon the market. The market was
also affected by considerable uncertainty regarding some
aspects of the Administration’s Phase Two program to
restrain inflation.
Treasury bill rates generally declined through mid­
month. The issuing rates moved steadily lower in the
first three regular weekly auctions held during November
(see Table II). Orders from foreign central banks con­
tinued to provide support for bill prices. The Treasury an­
nounced, on November 18, that it would auction $2.5
billion of tax anticipation bills (TABs) on November 24
to mature April 21, 1972. With the weekly auction of threeand six-month Treasury bills already scheduled for No­
vember 22 and the monthly auction of nine- and twelve­
month bills scheduled for November 23, the addition of a
further bill auction in a holiday-shortened week crowded
the calendar.
This heavy load of offerings, combined with some feel­
ing that international monetary negotiations might lead
to reductions in foreign bill holdings, resulted in sharply
higher yields during the week. Interest rates in the weekly
bill auction jumped up by 11 basis points to 4.236
percent on the three-month bills and by almost 16 basis

2 For details o f the refunding, see this R eview (N ovem ber 19 7 1 ),
page 264.

FEDERAL RESERVE BA N K OF NEW YORK

points on the six-month bill. The next day, the one-year
bills were auctioned at an average issuing rate of 4.563
percent, 7 basis points above the rate set in the October
auction. The April TABs were sold at an average rate
of 4.558 percent, about 8 basis points higher than the bid
rate on outstanding Treasury bills maturing April 20,
1972. This spread occurred despite the granting of a 50
percent Treasury Tax and Loan Account credit on the
new issues. The rate on these outstanding bills had ad­
vanced about 20 basis points during the statement week.
Treasury bill rates fell in the final days of November but
remained above the pre-Thanksgiving week levels. In the
weekly bill auction on November 29, the average issuing
rate on three-month bills advanced 9 basis points from the
rate set the week before.
With the new offerings of marketable debt in Novem­
ber, the Treasury raised $2.35 billion of cash, net of
repayments of maturing marketable issues, and issued a
further $312 million of nonmarketable debt. During the
first five months of the fiscal year that began on July 1,
1971, the Treasury raised $9.03 billion in net new cash
through marketable issues and a further $5.89 billion
through nonmarketable debt. This heavy use of non­
marketable debt contrasts sharply with the pattern of
finance during the corresponding period last year, when
$13.40 billion of cash was raised, $11.94 billion of it
through marketable debt. Most of this fiscal year’s increase
in nonmarketable debt has consisted of special certificates
of indebtedness sold to foreign central banks that have

Table II
AVERAGE ISSUING RATES*
AT REGULAR TREASURY BILL AUCTIONS
In percent
Weekly auction dates— November 1971
mai.urii.iea

Nov.

Three-month..........................................
Six-month..............................................

Nov.

Nov.

Nov.

Nov.

1

8

15

22

29

4.233
4.346

4.174
4.340

4.122
4.255

4.236
4.411

4.324
4.431

Monthly auction dates— September-November 1971

22

Oct.
26

Nov.
23

5.242
5.279

4.495
4.490

4.581
4.. 563

Sept.

Nine-month.
One-year.. . .

* Interest rates On bills are quoted in terms of a 360-day year, with the discounts from
par as the return on the face amount of the bills payable at maturity. Bond yield
equivalents, related to the amount actually invested, would be slightly higher.




287

absorbed dollars in the foreign exchange markets. Savings
bonds outstanding have also increased at a faster pace,
advancing by a net $1.06 billion during the first five
months of fiscal 1972 as compared with $408 million in the
corresponding year-earlier period.
The volume of new issues by Federal credit agencies
jumped in mid-November following three weeks in which
there had been no offerings at all. Between November 16
and November 23 a total of almost $2.17 billion of issues
by the Export-Import Bank, the Federal National Mort­
gage Association, the Banks for Cooperatives, and the
Federal Intermediate Credit Banks reached the market.
Of this, $1.43 billion was used to retire outstanding debt,
while the remaining $742 million represented new cash.
Net new cash raised so far in the second half of the year
has been substantially above the average of the last few
years, in contrast to the first half of 1971 when more debt
was retired than was issued. Earlier this year, large sav­
ings inflows to savings and loan associations enabled the
repayment of loans from the Federal Home Loan Banks.
The FHLBs, in turn, retired a substantial portion of the
debt that they had issued in early 1970. In October the
FHLBs again became net borrowers. Other agencies have
stepped up their net issues as well.
O TH ER SE C U R IT IE S M A R K E T S

The corporate bond market rally that had begun in late
September continued into the first week of November,
enabling dealers to sell a part of their sizable inventories.
However, the rally quickly faded in the next weeks. Soon,
only securities offered at somewhat higher yields than had
been experienced in the previous few weeks managed to
sell quickly. Several factors appeared to have contributed
to this reversal. Concern continued to be expressed as to
the degree of success that could be expected from Phase
Two of the President’s new economic program as it went
into effect in mid-November. The uneasiness, which had
led to a falling stock market the month before, began spill­
ing over into the bond market. Furthermore, investors
became quite conscious of the large size of dealer inven­
tories, and the calendar of new issues continued to be heavy
until the Thanksgiving holiday week.
The early enthusiasm exhibited in the market led under­
writers to price a utility bond rated Aa and marketed
November 4 to yield 7% percent, Vs percentage point
below a similar late-October issue. In the face of the
poor reception given to that and other aggressively priced
issues, two Aa utilities marketed November 9 and 11 were
priced to yield 7.50 percent, the same rate that had pre­
vailed in late October. Both issues sold well. Even so.

288

M ONTHLY REVIEW , DECEMBER 1971

C h a rt II

SELECTED INTEREST RATES
M O N E Y M A R K E T RATES

S e p te m b e r

O c to b e r

S e p te m b e r - N o v e m b e r 1971

N ovem ber

S e p te m b e r

B O N D M A R K E T YIELDS

O c to b e r

N o te : D a ta a re shown fo r business d ays on ly.
M O N E Y MARKET RATES Q UOTED: Bid rates fo r th re e -m o n th E u ro -d o lla rs in L o n d o n ; o ffe rin g

im m e d ia te ly a fte r it has b een re le a se d from s y n d ic a te re s tric tio n s ); d a ily a v e ra g e s o f y ie ld s on

ra te s (q u o te d in te rm s o f ra te o f discount) on 90- to 119-day p rim e co m m e rc ia l p a p e r

seasoned A a a - ra te d c o rp o ra te b o n d s ; d a ily a v e ra g e s o f y ie ld s on lo n g -term G o v e rn m e n t

q u o te d b y th re e o f the fo u r d e a le rs th a t re p o rt th e ir rates, o r th e m id p o in t o f the ra n g e

securities (bonds d ue o r c a lla b le in ten y e a rs o r more) a n d on G o v e rn m e n t s e c u ritie s d ue in th ree

q u o te d if no consensus is a v a ila b le ; the e ffe c tiv e ra te on F e d e ra l fun d s (the ra te most

to fiv e y e a rs , c o m p u te d on the b asis o f c lo sin g b id p ric e s ; T hursd a y a v e ra g e s o f y ie ld s on tw e n ty

re p re s e n ta tiv e o f th e tra n s a c tio n s e x e c u te d ); clo sin g b id rates (q u o te d in term s o f ra te o f

se a soned tw e n ty -y e a r ta x -e x e m p t b o n d s (c a rry in g M o o d y ’s ra tin g s o f A a a , A a , A , a n d Baa).

d is c o u n t) on n ew est o u ts ta n d in g th re e -m o n th T re a su ry b ills .
B O N D MARKET YIELDS QUOTED: Y ields on hew A a -ra te d p u b lic u tility b o n d s (arrow s p o in t from
u n d e rw ritin g syn d ica te re o ffe rin g y ie ld on a g ive n issue to m a rke t y ie ld on the sam e issue

further weakening of the market led dealers to offer an
even more generous 7.60 percent on another Aa utility
bond offered November 17. This issue was well received,
and underwriters reoffered two similar issues to yield 7.54
percent early in the following week. While one sold well,
the larger of the two encountered some resistance.
At the end of November, another Aa utility bond was
offered to yield 7.55 percent and sold slowly. Similar price
declines were exhibited by other bonds. A Bell Telephone
subsidiary bond offering on November 15 sold slowly
even though it yielded 7.45 percent, 10 basis points above
the yield offered in late October on a bond sold by another
Bell Telephone subsidiary.




Sources: F e d e ra l Reserve Bank o f N ew Y ork, B o a rd o f G ove rn o rs of the F ed e ra l Reserve System ,
M o o d y ’ s Investors S ervice, a n d The W e e k ly Bond Buyer.

The tax-exempt sector suffered from considerable con­
gestion, as a heavy calendar of new issues further bur­
dened already swollen dealer inventories. The Blue List of
advertised inventories had reached the highest level of the
year at the end of October, standing at $970 million. After
a slight decline early in November, it climbed again to
$1,126 million on November 18, an all-time high. The con­
gestion was exacerbated by waning institutional demand.
Commercial banks, which had been major buyers of taxexempt securities in October, bought smaller quantities in
November. The Weekly Bond Buyer's twenty-bond munic­
ipal index rose 25 basis points to 5.36 percent from late
October to November 24 (see Chart II).

FEDERAL RESERVE BAN K OF NEW YORK

289

The Lag in the Effect of Monetary Policy: A Survey of Recent Literature
By

M

ic h a e l

J.

During the last ten years the views of economists—
both monetarists and nonmonetarists— on the lag in the
effect of monetary policy on the economy have changed
considerably. This article examines some of the recent evi­
dence which has served as the basis for these changes.
Prior to 1960, quantitative estimates of the lag in the
effect of monetary policy were rare. While there had always
been disagreement on the effectiveness of monetary policy,
a substantial number of economists seemed to accept the
proposition that there was sufficient impact in the reason­
ably short run for monetary policy to be used as a device
for economic stabilization. Although this view did not go
unquestioned— see, for example, Mayer [26] and Smith
[29]1 the main challenge to the conventional thinking
—
came from Milton Friedman. He argued that monetary
policy acts with so long and variable a lag that attempts to
pursue a contracyclical monetary policy might aggravate,
rather than ameliorate, economic fluctuations. In sum­
marizing work done in collaboration with Anna Schwartz,
he wrote [16]: “We have found that, on the average of 18
cycles, peaks in the rate of change in the stock of money
tend to precede peaks in general business by about 16
months and troughs in the rate of change in the stock of
money precede troughs in general business by about 12
months. . . . For individual cycles, the recorded lead has

* The author, who is a Special Assistant in the Research and Sta­
tistics function, wishes to acknowledge the helpful com ments o f
Richard G. D avis, David H. Kopf, Robert G. Link, and other col­
leagues at the Federal Reserve Bank o f N ew York. In addition, the
excellent research assistance o f Susan Skinner and Rona Stein is
gratefully acknowledged. The views expressed in this paper are the
author’s alone and do not necessarily reflect those o f the individuals
noted above or the Federal Reserve Bank o f N ew York.
1 The numbers in brackets refer to the works cited at the end of
this article.




H

am burger*

varied between 6 and 29 months at peaks and between 4
and 22 months at troughs.”
Many economists were simply not prepared to believe
Friedman’s estimates of either the length or the vari­
ability of the lag. As Culbertson [11] put it, “if we assume
that government stabilization policies . . . act with so
long and variable a lag, how do we set about explaining
the surprising moderateness of the economic fluctua­
tions that we have suffered in the past decade?” Culbert­
son’s own conclusion was that “the broad record of ex­
perience support[s] the view that [contracyclical] mone­
tary, debt-management, and fiscal adjustments can be
counted on to have their predominant direct effects within
three to six months, soon enough that if they are under­
taken moderately early in a cyclical phase they will not
be destabilizing”.
Kareken and Solow [5] also appear to have been un­
willing to accept Friedman’s estimates. They summarized
their results as follows: “Monetary policy works neither so
slowly as Friedman thinks, nor as quickly and surely as
the Federal Reserve itself seems to believe. . . . Though the
full results of policy changes on the flow of expenditures
may be a long time coming, nevertheless the chain of effects
is spread out over a fairly wide interval. This means that
some effect comes reasonably quickly, and that the effects
build up over time so that some substantial stabilizing power
results after a lapse of time of the order of six or nine
months.”
However, as Mayer [27] pointed out, this statement
is inconsistent with the evidence presented by Kareken
and Solow. They reported estimates of the complete lag in
the effect of monetary policy on the flow of expenditures for
only one component of gross national product (GNP),
namely, inventory investment, and this lag is much longer
than Friedman’s lag. For another sector—producers’ du­
rable equipment— they provided data for only part of the
lag, but even this is longer than Friedman’s lag. Thus,

290

M ONTHLY REVIEW , DECEMBER 1971

Mayer noted that Kareken and Solow “should have criti­
cized Friedman, not for overestimating, but for underesti­
mating the lag”.
More recently, it is the monetarists who have taken the
view that the lag in the effect of monetary policy is rela­
tively short, and the nonmonetarists who seem to be
claiming longer lags. This showed up in the reaction
to the St. Louis (Andersen and Jordan) equation [4]. Ac­
cording to this equation, the total response of GNP to
changes in the money supply is completed within a year.
In his review of the Andersen and Jordan article, Davis
[12] wrote “the most surprising thing about the world of
the St. Louis equation is not so much the force, but rather
the speed with which money begins to act on the economy”.
If the level of the money supply undergoes a $1 billion
once-and-for-all rise in a given quarter, it will (according
to the St. Louis equation) raise GNP by $1.6 billion in that
quarter and by $6.6 billion during four quarters. In con­
trast, Davis found that in the Federal Reserve BoardMassachusetts Institute of Technology model—which was
estimated by assuming nonborrowed reserves to be the
basic monetary policy variable— a once-and-for-all increase
in the money supply of $1 billion in a given quarter has
almost no effect on GNP in that quarter and, even after
four quarters, the level of GNP is only about $400 million
higher than it otherwise would be. Thus, he concluded,
“what is at stake in the case of the St. Louis equation is not
merely a ‘shade of difference’ but a strikingly contrasting
view of the world— at least relative to what is normally
taken as the orthodox view roughly replicated and con­
firmed both in methods and in result by the Board-MIT
model”.2
The Federal Reserve Board-MIT model (henceforth
called the FRB-MIT model) is not the only econometric
model suggesting that monetary policy operates with a long
distributed lag. Indeed, practically every structural model of
the United States economy which has been addressed to
this question has arrived at essentially the same answer.3
The most recent advocates of short lags are Arthur Laf­

2 The properties o f the Federal Reserve-M IT m odel are discussed
by de Leeuw and G ram lich [13, 14] and by A ndo and M odigliani

[6].
3 See Hamburger [21] and M ayer [27]. F or a recent discussion o f
why the lag should be long, see D avis [12], G ram lich [19], and
Pierce [28]. The alternative view is presented by W hite [31], who
also gives reasons for believing that the procedures used to estimate
the parameters o f large-scale econom etric models, particularly the
FR B-M IT model, m ay yield “greatly exaggerated” estim ates o f the
length o f the lag.




fer and R. David Ranson [25]. They have argued that:
“Monetary policy, as represented by changes in the con­
ventionally defined money supply [demand deposits plus
currency], has an immediate and permanent impact on the
level of GNP. For every dollar increase in the money sup­
ply, GNP will rise by about $4.00 or $5.00 in the current
quarter, and not fall back [or rise any further] in the
future. Alternatively, every 1 percent change in the money
supply is associated with a 1 percent change in GNP.”
This article reviews some of the recent professional
literature on the lag in the effect of monetary policy, with
the objective of examining the factors which account for
differences in the results. Among the factors considered
are: (1) the type of statistical estimating model, i.e.,
structural versus reduced form equations; (2) the specifi­
cation of the monetary policy variable; and (3) the influ­
ence of the seasonal adjustment procedure. For the most
part, the analysis is confined to the results obtained by
others. New estimation is undertaken only in those instances
where it is considered necessary to reconcile different sets
of results.
STRUCTURAL V ER SU S REDUCED FORM M ODELS

We turn first to the question of whether it is more ap­
propriate to use structural or reduced form models to
estimate the effects of stabilization policy on the economy.
A structural model of the economy attempts to set forth
in equation form what are considered to be the underlying
or basic economic relationships in the economy. Although
many mathematical and statistical complications may
arise, such a set of equations can, in principle, be “re­
duced” (solved). In this way key economic variables, such
as GNP, can be expressed directly as functions of policy
variables and other forces exogenous to the economy. While
the difference between a structural model and a reduced
form model is largely mathematical and does not neces­
sarily involve different assumptions about the workings of
the economy, a lively debate has developed over the ad­
vantages and disadvantages of these two approaches.
Users of structural models stress the importance of tracing
the paths by which changes in monetary policy are assumed
to influence the economy. Another advantage often claimed
for the structural approach is that it permits one to incor­
porate a priori knowledge about the economy, for example,
knowledge about identities, lags, the mathematical forms
of relationships, and what variables should or should not be
included in various equations (Gramlich [20]).
On the other hand, those who prefer the reduced form
approach contend that, if one is primarily interested in
explaining the behavior of a few key variables, such as

FEDERAL RESERVE BA N K OF NEW YORK

GNP, prices, and unemployment, it is unnecessary to es­
timate all the parameters of a large-scale model. In addi­
tion, it is argued that, if the economy is very complicated,
it may be too difficult to study even with a very compli­
cated model. Hence, it may be useful simply to examine
the relationship between inputs such as monetary and fiscal
policy and outputs such as GNP.
Considering the heat of the debate, it is surprising that
very little evidence has been presented to support either
position. The only studies of which I am aware come from
two sources: simulations with the FRB-MIT model, re­
ported by de Leeuw and Gramlich [13, 14], and the sep­
arate work of de Leeuw and Kalchbrenner [15]. The latter
study reported the estimates of a reduced form equation for
GNP, using monetary and fiscal policy variables simi­
lar to those in the FRB-MIT model. The form of the equa­
tion is:

291

C h a rt I

CUMULATIVE EFFECTS OF A ONE DOLLAR CHANGE
IN NONBORRO W ED RESERVES O N GNP
D o lla rs

D o lla rs

Equation 1
7

7

AYt — 3. -f- 2 biANBRt-i -J- 2 Ci AEt-i
i= o

i= o

7

2 diARAt-i -f- Ut

i= o

Q u a rte rs a fte r th e ch a n g e in n o n b o rro w e d reserves
Note: FRB-MIT = Federal Reserve Board-M assachusetts Institute o f Technology
econometric model.

where
A Y = Quarterly change in G N P, current dollars.
A N B R = Quarterly change in nonborrowed reserves adjusted for
reserve requirement changes.
A E = Quarterly change in high-em ployment expenditures o f
the Federal Government, current dollars.
A R A = Quarterly change in high-em ploym ent receipts o f the
Federal Government in current-period prices,
u = Random error term.

All variables are adjusted for seasonal variation, and the
lag structures are estimated by using the Almon distributed
lag technique.4
Chart I illustrates the lag distributions of the effect on
GNP of nonborrowed reserves— the principal monetary
variable used in the studies just mentioned. The chart shows
the cumulative effects of a one dollar change in non­
borrowed reserves on the level of GNP as illustrated by four
experiments, the reduced form equation of de Leeuw and
Kalchbrenner and three versions of the FRB-MIT model.
The heavy broken line traces the sum of the regression
coefficients for the current and lagged values of non-

borrowed reserves in the de Leeuw-Kalchbrenner equation
(i.e., the sum of the bj’s). The other lines show the results
obtained from simulations of the FRB-MIT model; FRBMIT 1969(a) and FRB-MIT 1969(b) represent simula­
tions of the 1969 version of the model, with two different
sets of initial conditions.5 FRB-MIT 1968 gives the simula­
tion results for an earlier version of the model.
Although there are some large short-run differences in
the simulation results, these three experiments suggest
similar long-run effects of nonborrowed reserves on in­

5
For the FRB-M IT 1969(a) sim ulation, the values o f all exoge­
nous variables in the m odel, except nonborrowed reserves, are set
equal to their actual values starting in the first quarter o f 1964. For
the FRB-M IT 1 969(b ) sim ulation, the starting values for these
variables are their actual values in the second quarter o f 1958. The
obvious difference between these tw o sets o f initial conditions is the
difference in inflationary potential. The quarters during and after
1964 were ones o f high resource utilization, and an expansion of
4 U se o f the A lm on [1] procedure has becom e quite popular in reserves at such a time m ight be expected to stimulate price increases
recent years as it im poses very little a priori restriction on the shape
promptly. On the other hand, there was substantial excess capacity
in 1958 and a change in reserves under such conditions would be
o f the lag structure, requiring merely that it can be approximated
by a polynom ial. In the applications discussed in this article, it is
expected to have a minim al short-run effect on prices. The differ­
generally assumed that a second- or a fourth-degree polynom ial is
ence in these price effects is significant since it is movem ents in
current-dollar G N P which are being explained.
sufficiently flexible to reproduce closely the true lag structure.




292

M ONTHLY REVIEW, DECEMBER 1971

come. Such a finding is not very surprising; what is sig­
nificant, in view of the debate between those who prefer
structural models and those who prefer reduced forms, is
that after the first three or four quarters the de LeeuwKalchbrenner results lie well within the range of the simu­
lation results.6
Thus, we find that when nonborrowed reserves are chosen
as the exogenous monetary policy variable, i.e., the vari­
able used in estimating the parameters of the model, it
makes very little difference whether the lag in the effect of
policy is determined by a structural or a reduced form
model. There is, to be sure, no assurance that similar results
would be obtained with other monetary variables or with
other structural models (including more recent versions of
the FRB-MIT model). In the present case, however, the
use of reduced form equations does not lead to estimates
of the effects of monetary policy on the economy that differ
from those obtained from a structural model. For the pur­
poses of our analysis, this finding implies that the type of
statistical model employed to estimate the lag in the effect
of monetary policy may be less important than other factors
in explaining the differences in the results that have been
reported in the literature.
SPE C IF IC A T IO N OF TH E M O N E T A R Y
PO L IC Y V A R IA B L E

Another important difference among the various studies
of the lag is the variable used to represent monetary policy.
The aim of this section is not to contribute to the contro­
versy about the most appropriate variable, but rather to
summarize the arguments and spell out the implications
of the choice for the estimate of the lag in the effect of
policy.
In recent years, three of the most popular indicators of
the thrust of monetary policy have been the money sup­
ply, the monetary base, and effective nonborrowed re-

6 D e Leeuw and Kalchbrenner do not estim ate lags longer than
seven quarters. W hile it is conceivable that the curve representing
their results could flatten out (or decline) after period t-7, the
shape of the curve up to that point and the results obtained by
others, such as those shown in Chart II, make this possibility seem
highly unlikely. The initial negative values for the de LeeuwKalchbrenner curve arise because of the large negative estim ate of
b0 in equation 1; the estim ates for all other b’s are positive.
As de Leeuw and Kalchbrenner pointed out, it is difficult to provide
an econom ic explanation for changes in nonborrowed reserves
having a negative effect on G N P in the current quarter. It seems
more reasonable, therefore, that the result reflects “reverse causa­
tion”, running from G N P to nonborrowed reserves— that is, the
Federal Reserve’s attempt to pursue a contracyclical monetary
policy. This point is discussed at greater length in Hamburger [22],




serves.7 Monetarists prefer the first two variables on the
grounds that they provide the most appropriate measures
of the impact of monetary policy on the economy. Critics
of the monetarist approach contend that these variables
are deficient because they reflect the effects of both policy
and nonpolicy influences and hence do not provide reliable
(i.e., statistically unbiased) measures of Federal Reserve
actions. The variable most often suggested by these econ­
omists is effective nonborrowed reserves.8 In reply, the
monetarists have argued that, since the Federal Reserve
has the power to offset the effects of all nonpolicy influ­
ences on the money supply (or the monetary base), it is
the movements in the money variable and not the reasons
for the movements which are important (Brunner [7]
and Brunner and Meltzer [8]). However, this sidesteps
the statistical question of whether the money supply or
the monetary base qualify as exogenous variables to be
included on the right-hand side of a reduced form equa­
tion. (For a further discussion, see Gramlich [20] and
Hamburger [22].)
Chart II presents the cumulative percentage distributions
of the effects of various monetary variables on nominal
GNP, as implied by the parameter estimates for equa­
tions similar to equation 1, that is, reduced form equa­
tions relating quarterly changes in GNP to quarterly
changes in monetary and fiscal policy variables. The mone­
tary variables are effective nonborrowed reserves, the
monetary base, the narrowly defined money supply (pri­
vate holdings of currency and demand deposits), and
total reserves. The latter is defined as effective nonbor­
rowed reserves plus member bank borrowings from the
Federal Reserve. It is also approximately equal to the
monetary base less the currency holdings of nonmember
banks and of the nonbank public. Once again, the lag
structures for the monetary and fiscal policy variables are
estimated using the Almon distributed lag technique. In all
cases, with the possible exception of the monetary base,
the lags chosen are those which maximize the R 2 (coeffi­
cient of determination adjusted for degrees of freedom)

7 Nonborrow ed reserves adjusted for changes in reserve require­
ments. A similar adjustment is made in com puting the monetary
base, which is defined as total member bank reserves plus the cur­
rency holdings of nonmember banks and the nonbank public. The
reserve figure included in the base is also adjusted to neutralize the
effects of changes in the ratio o f demand deposits to time deposits
and changes in the distribution of deposits am ong banks subject to
different reserve requirements.
8 A m ong others, see de Leeuw and Kalchbrenner [15], Gramley
[18], and Hendershott [23].

FEDERAL RESERVE BA N K OF NEW YORK

C h a rt II

CUMULATIVE PERCENTAGE DISTRIBUTIONS OF THE EFFECTS
OF VARIOUS MONETARY AGGREGATES ON GNP
P erce nt

Percent

293

occurs in five quarters and that the full effect is distributed
over two and a half years.1
0
Thus, the evidence suggests that the relatively short lags
that have been found by the monetarists in recent years
depend more on their specification of the monetary policy
variable than on the use of a reduced form equation.
Whether or not these estimates understate the true length
of the lag, they seem roughly consistent with the prevailing
view among economists in the early 1960’s. They are, for
example, essentially identical with Mayer’s [26] results
which suggested that most of the effect of a change in policy
occurs within five quarters. As indicated above, wide ac­
ceptance of the proposition that monetary policy operates
with a long lag—i.e., a substantial portion of the impact of
a policy change does not take place until a year or more
later— is of relatively recent vintage and appears to have
been heavily influenced by the results of those who do not
consider the money supply to be an appropriate measure
of monetary policy impulses.

Q u a rte rs a fte r th e cha n g e in th e m o n e ta ry v a ria b le
Sources: See fo otno te 9.

of the equation. Percentage distributions are used to high­
light the distribution of the effects over time as opposed
to their dollar magnitudes.9
The results indicate that the choice of the exogenous
monetary policy variable has a significant effect on the
estimate of the lag in the effect of policy. If the money
supply, the monetary base, or total reserves are taken as
the monetary variable, the results suggest that the total
response of GNP to a change in policy is completed within
four or five quarters. On the other hand, those who con­
sider nonborrowed reserves to be the appropriate variable
would conclude that less than 40 percent of the effect

THE SEASO NAL ADJUSTM ENT PROBLEM

One of the most recent investigations of the effects of
monetary and fiscal policy on the economy is that conducted
by Laffer and Ranson for the Office of Management and
Budget [25]. Perhaps the most striking finding of this study
is that every change in the money supply has virtually all
its effect on the level of GNP in the quarter in which it
occurs. Or, to put this differently, there is little evidence
of a lag in the effect of monetary policy. This finding which
stands at odds with most other evidence, both theoretical
and empirical, is attributed by Laffer and Ranson largely
to their use of data that are not adjusted for seasonal vari­
ation.1 They contend that the averaging (or smoothing)
1
properties of most seasonal adjustment procedures tend to
distort the timing of statistical relationships. Hence, spe­
cious lag structures may be introduced into the results.
As shown below, however, the results reported by
Laffer and Ranson are much more dependent on their
choice of time period (1948-69) than on the use of sea­
sonally unadjusted data. For, if their nominal GNP equa­
tion is reestimated for the period 1953-69 (the period em­
ployed in the current version of the St. Louis model [3]

9 The estimates shown in Chart II are derived from the equations
reported by Corrigan [10] and by Andersen and Jordan [4]. Cor­
rigan’s results are used for the nonborrowed reserves, total reserves,
and m oney supply curves (the nonborrowed reserves equation is
not shown in his article but is available on request). H e did not
estimate an equation for the monetary base. The fiscal policies
variables used in all three equations are the changes in the G overn­
m ent spending and tax com ponents o f the “initial stim ulus” m ea­
10 A similar conclusion was reached by Andersen [2], who found
sure o f fiscal policy. The monetary base curve is derived from the
even longer lags when nonborrowed reserves are used as the m one­
Andersen and Jordan results. The fiscal measures used in this study
tary policy variable.
are the G overnm ent expenditure and receipt com ponents o f the
11 Other studies which find very short lags in the effect o f m on­
high-em ploym ent budget. The criterion used by Andersen and Jor­
etary policy are cited by Laffer and Ranson [25].
dan to select their lag structures is described by Keran [24].




294

M ONTHLY REVIEW, DECEMBER 1971

and in most other recent investigations), it makes very
little difference whether one uses seasonally adjusted or
unadjusted data. They both indicate that a significant por­
tion of the effect of a change in money does not occur for
at least two quarters.
The equation selected by Laffer and Ranson to explain
the percentage change in nominal GNP is:1
2

where
%AY
% A Mi

= Quarterly percentage change in nom inal G N P .
= Quarterly percentage change in M i (the narrowly de­
fined m oney supply).
%AG
= Quarterly percentage change in Federal G overnm ent
purchases o f goods and services.
ASH
= Quarterly change in a measure o f industrial man-hours
lost due to strikes.
%AS&P = Quarterly percentage change in Standard and Poor’s
Com posite Index o f C om m on Stock Prices (the “S&P
500” ).
Di
= Seasonal dum m y variable for the first quarter.
D2
= Seasonal dum my variable for the second quarter.
D3
= Seasonal dumm y variable for the third quarter.

Equation 2
% A Y = 3.21 + 1.10% A M i + .136% A G — .069% AG_i
(4 .9 )
(5 .5 )
(6 .9 )
(3 .3 )
— .039% AG_o — .024% AG _3 — .046A S H
(1 .9 )
(1 .2 )
(3 .7 )
+ .068% AS&P-i — 9.8 D i + 2.5 D £ — 3.0D ,
(2 .2 )
(1 2 .1 ) (2 .6 )
(4 .1 )
R 2= .958

SE = 1.31

Interval: 1948-1 to 1969-IV

12 The numbers in parentheses are t-statistics for the regression
coefficients. SE is the standard error o f estim ate o f the regression.
A subscript preceded by a minus sign indicates that the variable
is lagged that many quarters. In estim ating their model, Laffer
and Ranson use quarterly changes in the natural logarithms o f
the variables. This is roughly equivalent to using quarter-to-quarter
percentage changes.

All data used in the calculations are unadjusted for
seasonal variation. The three dummy variables (D u D2,
and D3) are introduced to allow for such variation and
to permit estimation of the seasonal factors. In principle,
joint estimation of the seasonal factors and the economic
parameters of a model is preferable to the use of data
generated by the standard type of seasonal adjustment
procedure. However, in having only three dummy variables,
Laffer and Ransom assume that the seasonal pattern in
income is constant over the entire sample period. If this
assumption is not correct, it becomes a purely empirical
question as to whether their procedure is any better or

Table I
REGRESSIONS EXPLAINING THE PERCENTAGE CHANGE IN GROSS NATIONAL PRODUCT
Quarterly seasonally unadjusted data
Equation

Constant

j % A M i % AM i_x % AM i_2 % AM i _3 % AM i ^

%AG

% A G -i

% A G -£

%AG_3

ASH

%AS&P-i

Dx

Da

Da

R2
SE

.958
1.31

1948-1 to 1969-IV
2............

3.21
(4.9)

3................

3.36
(3.9)

1.03
(4.4)

.136
(6.9)

1.10
(5.5)
-.4 1
(1.7)

.49
(2.1)

—.31
(1.3)

.30
(1.3)

-.0 6 9
(3.3;

-.0 3 9
(1.9)

—.024
(1.2)

—.046
(3.7)

.068
(2.2)

-9 .8
(12.1)

2.5
(2.6)

—3.0
(4.1)

.136
(7.1)

-.0 7 3
(3.7)

-.0 3 4
(1.7)

-.0 2 4
(1.3)

-.045
(3.6)

.095
(2.9)

-9 .5
(7.6)

1.3
(0.9)

- 2 .9
(2.4)

-1 1 .0 -1 .5
(8.8) (0.8)

- 2 .7
(2.3)

.983
0.86

3.7
(0.8)

1.0
(0.3)

.983
0.86

1

.961
1.26

1948-1 to 1952-IV
2a..............

5.05
(4.8)

.61
(1.6)

3a..............

2.38
(1.06)

1.11
(2.0)

-.2 9
(0.5)

j -.1 8
| (0.2)

!
1 -.2 4
| (0.3)

i
j .125
(5.7)
.66
: (1.4)

-.1 1 9
(5.6)

-.0 2 2 j -.0 1 5 1 -.0 5 0
(3.3) |
(1.2) 1 (0.6)

| .121
| (3.7)

-.1 2 2
(4.0)

-.0 2 4
-.0 3 0 i -.0 3 6 1 .171
(0.9) : (0.9)
(1.9) ! (2.0)

.221
(3.2)

- 7 .2
(2.3)

i

1953-1 to 1969-IV
2b..............

4.16
(5.1)

3b..............

5.18
(5.1)

.64
(2.4)

.143
(3.8)

.73
(3.1)
- .4 0
(1.3)

.88
(3.1)

-.0 7
(0.3)

- .0 5
(0.2)

-.008
(0.2)

-.0 4 2
(1.1)

-.048
(1.3)

.160
(4.4)

.002
(0.1)

-.0 4 4
(1.2)

-.0 6 8
(1.9)

-.0 2 2
(1.4)

Note:
r2
SE

Values of “t” statistics are indicated in parenthesis. For explanation of the
symbols other than those shown below, see equation 2 above.
= Coefficient of determination (adjusted for degrees of freedom).
* Standard error of estimate of the regression.




-1 1 .2
(10.2)

1.8
(1.6)

-4 .2
(4.2)

.964
1.20

-.0 2 6
(1.7)
i

.061
(1.8)
.079
(2.1)

-1 1 .6 -1 .8
(7.*) (1.0)

- 5 .2
(3.6)

.968
1.13

295

FEDERAL RESERVE BAN K OF NEW YORK
Table II
SELECTED REGRESSION RESULTS FOR EQUATIONS EXPLAINING THE PERCENTAGE CHANGE IN GROSS NATIONAL PRODUCT
Quarterly data
Regression coefficients

Time
period

Data

3..............................

1948-1 to 1969-IV

3b............................
3b'...........................

Equation

R2

%AMl_3

%AMi 4

SE

.49
(2.1)

-.3 1
(1.3)

.30
(1.3)

.961
1.26

- .4 0
(1.3)

.88
(3.1)

-.0 7
(0.3)

- .0 5
(0.2)

.968
1.13

-.0 8
(0.3)

.53
(1.9)

.32
(1.2)

-.2 1
(1.1)

.541
0.71

%AMi

%AMi_x

NSA

1.03
(4.4)

-.4 1
(1.7)

1953-1 to 1969-IV

NSA

.64
(2.4)

1953-1 to 1969-IV

SA

.37
(1.8)

%AMi _2

Note: Values of “t” statistics are indicated in parenthesis. For explanation of the
symbols other than those shown below, see equation 2 on page 294.
r 2 s Coefficient of determination (adjusted for degrees of freedom).
SE = Standard error of estimate of the regression.
NSA =N ot seasonally adjusted.
SA = Seasonally adjusted data are used for Mi, GNP, and G.

worse than the use of seasonally adjusted data.
Stock market prices are included in the equation on the
assumption that the current market value of equities pro­
vides an efficient forecast of future income. The variable
representing the percentage of man-hours lost due to strikes
(SH) is included for institutional reasons.
Aside from these factors, the Laffer-Ranson equation is
quite similar to the St. Louis equation. The most im­
portant difference is that the former contains only the
current-quarter value of money. This implies that a change
in the money supply has a once-and-for-all effect on the
level of income. Equation 3 shows the results obtained when
four lagged values of the percentage change in
are
included in the model. Only the coefficients of the money
variables are shown below; the rest of the results for this
equation as well as those for equation 2 are reproduced in
the first portion of Table I.

like equation 2— implies that the current and long-run
effects of money on income are, for all practical purposes,
the same. An increase of 1 percent in Mx is associated with
a roughly 1.0 percent rise in income in the current quarter
and a 1.1 percent rise in the long run.
To test the hypothesis, suggested above, that it is the time
interval used by Laffer and Ranson which is largely respon­
sible for this result, equations 2 and 3 were reestimated for
the subperiods 1948-1 to 1952-IV and 1953-1 to 1969-IV.
The results (see the two lower sections of Table I) show
that: (a) the relationship between money and income in
the 1948-52 period is not statistically significant (equations
2a and 3 a )1 and (b) there is a significant lag in the effect
3
of money on income during the more recent period. Indeed,
the largest single change in income as a result of a change
in money during this period occurs after a lag of two quar-

Equation 3
% A Y = 3.36 + 1.03% A M i— .41% A M , x + .49% A M i_a
(3 .9 ) (4 .4 )
(1 .7 )
"
(2 .1 )
— .31% A M , , + .30% A Mi
(1 .3 )
'
(1 .3 )
R 2=

.961

SE = 1.26

....

Interval: 1948-1 to 1969-IV

Following Laffer and Ranson, the coefficients of this
equation are estimated without the use of the Almon dis­
tributed lag technique. Although some of the lagged money
coefficients approach statistical significance, equation 3—




13
The contribution o f the five m oney variables to the explana­
tory pow er o f equation 3 a m ay be evaluated by using the sta­
tistical procedure known as the F-test. W hen this is done, we find
that the relationship between m oney and incom e is not significant
even at the .20 confidence level. It should also be noted that the poor
showing o f the m oney variables in the 1948-52 period cannot be at­
tributed simply to the shortness o f the period and hence the limited
number o f degrees o f freedom . These conditions do not prevent
us from finding statistically significant relationships for m ost of
the other variables included in equations 2a and 3a.

296

M ONTHLY REVIEW, DECEMBER 1971

tribution of the effects of money on income as implied by
these equations. It is clear from the chart that it is the time
period chosen by Laffer and Ranson which is largely re­
sponsible for their controversial result rather than the use
of seasonally unadjusted data. This shows up even more
dramatically when the equations are estimated with the
Almon procedure. When this is done there is very little
difference between the distributed lag implied by the
Laffer-Ranson equations (using seasonally unadjusted
data but fitted to the 1953-69 period) and that implied
by the St. Louis equation [3], see Chart IV.15 Thus,
once the period through the Korean war is eliminated
from the analysis, it makes no difference at all whether
the relationship between money and income is estimated
with seasonally adjusted data or unadjusted data and
dummy variables. Both procedures yield a relatively short,
but nevertheless positive, lag in the effect of monetary
policy.16
T H E A L M O N LAG T E C H N IQ U E

ters (equation 3b).1
4
Perhaps the most interesting feature of the results is the
similarity between the “money coefficients” for the period
1953-69 (equation 3b) and those which have been obtained
by other researchers using seasonally adjusted data for the
same period. To demonstrate this, equation 3b was reestimated with seasonally adjusted data for Mi, GNP,
and G. The coefficients for the current and lagged money
variables for this equation (3b') and for equations 3 and
3b are reported in Table II. Once again the equations
are estimated without the use of the Almon distributed lag
technique. Chart III shows the cumulative percentage dis­

14
In fairness to Laffer and Ranson, it should be noted that even
for equation 3b we are unable to reject the hypothesis (at the .05
confidence level) that the current-quarter m oney coefficient is less
than 1.0. H owever, there appears to be no necessary reason why the
current-quarter effect should be singled out for special considera­
tion. Thus, equation 3b also implies that after six months the cum u­
lative effect of m oney on incom e is not significantly different from
zero.
The hypothesis that the same regression m odel fits the entire
Laffer-Ranson sam ple period (1948-69) m ay be evaluated by means
o f a procedure developed by Chow [9]. D oing this, we find that
the hypothesis m ay be rejected at the .01 confidence level, that
is, the differences in the parameter estim ates o f equations 2a and 2b
and equations 3a and 3b are statistically significant.




Finally, it seems worthwhile to say a few words about
the use of the Almon technique and its effect on the esti­
mates of the structure (or distribution) of the lag. As noted
earlier, this procedure has become quite popular in recent
years. It tends to smooth out the pattern of the lag co­
efficients and makes them easier to rationalize. However,
the extent of the differences in the estimates obtained for
individual lag coefficients, with and without the use of the
technique, provides some reason for concern.
For example, in his experiments with the St. Louis equa­
tion, Davis found that either 29 percent or 46 percent of
the ultimate effect of money on income could be attributed
to the current quarter. The lower number was obtained
when the equation was estimated using the Almon tech­
nique, while the higher value occurred when the Almon
constraint was not imposed on the equation. The explana­
tory power of the equation was essentially the same in

15 For comparative purposes, the constraints im posed in esti­
mating the Laffer-Ranson equations with the A lm on procedure are
the same as those used in the St. Louis equation, i.e., a fourthdegree polynom ial with the t + 1 and t— 5 values o f the m oney
coefficients set equal to zero.
16 A n alm ost identical conclusion is reached in a forthcom ing
paper by Johnson [23a]. Laffer and Ranson provide an alternative
explanation o f the difference between their own lag results— shown
in equation 3— and the St. Louis results. H owever, there is no
m ention in their article that the time period em ployed to estim ate
their equations is considerably different from that used in the
St. Louis m odel and m ost other recent studies.

FEDERAL RESERVE BAN K OF NEW YORK

both cases.17 In the Laffer-Ranson model as well, substan­
tially different estimates of the lag structure are consistent
with about the same R 2. In this model the estimates of the
current-quarter effect of money on income are 31 percent
with the Almon technique and 64 percent with uncon­
strained lags (compare the Laffer-Ranson NSA curves
for the 1953-69 period in Charts III and IV ). On the
other hand, over the first six months it is the Almon tech­
nique which yields a faster response of income to money,
for both the Davis experiments and the Laffer-Ranson
model, than is obtained with unconstrained lags.
The wide divergence in these estimates of the impact of
monetary variables over short periods, depending on the
nature of the estimating procedure employed, suggests that
existing estimates of the underlying lag structure are not
very precise. One reason for this may be that the pattern
of the lag varies over time.18 In any event, the uncertainties
surrounding the structure (distribution) of the lag are not
eliminated by the Almon technique. Thus, use of any
existing estimates of the lag structure as a firm basis for
short-run policy making would seem rather hazardous at
this time.
C O N C L U D IN G C O M M E N T S

One finding stands out from the results presented above,
namely, that there is a lag in the effect of monetary policy.
Nevertheless, estimates of the length of the lag differ
considerably. Of the three factors considered in this paper
that might account for these differences, the most impor­
tant is the specification of the appropriate monetary policy
variable (or variables) in the construction of econometric
models. Use of nonborrowed reserves as the exogenous
monetary variable suggests that less than 40 percent of
the impact of a monetary action occurs within five quarters

17 See D avis [12]. The estimates o f R 2 are .46 and .47, respec­
tively. The period used to estim ate the equation was 1952-1 to
1968-11.
18 Some support for this hypothesis is provided by the sim ula­
tion results for the FR B-M IT m odel shown in Chart I as well
as the results obtained by Warburton [30] and Friedman and
Schwartz [17] in their analyses o f the timing relations between the
upswings and dow nswings in m oney and econom ic activity.




297

C h a rt IV

CUMULATIVE PERCENTAGE DISTRIBUTION OF
THE EFFECTS OF M ONEY ON GNP
P ercept

P ercent

Q u a rte rs a fte r th e ch a n g e in m oney
Note: NSA - not seasonally adjusted; SA = seasonally adjusted.

and that the full effect is distributed over two and a half
years. On the other hand, use of the money supply, the
monetary base, or total reserves suggests that most of the
effect occurs within four or five quarters. The latter esti­
mate of the lag may appear to be relatively short. How­
ever, it does not seem to be grossly out of line with the
view held by the majority of economists in the early
1960’s.
The two other factors considered and found to be less
important in explaining the differences in the estimates of
the length of the lag are (1) the type of statistical estimat­
ing model (structural versus reduced form equations) and
(2) the seasonal adjustment procedure. In both of these
instances, though, there is not enough evidence available
to draw very firm conclusions; hence further work might
prove fruitful.
Finally, more work is also needed to help refine esti­
mates of the distribution of the lag. Existing estimates of
the lag structure do not appear to be sufficiently precise
to justify large or frequent short-run adjustments in the
growth rates of monetary aggregates.

298

M ONTHLY REVIEW , DECEMBER 1971

W O R K S C ITED

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tions and Expenditures”. E conom etrica (January 1965),
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[17] Friedman, M ., and Schwartz, A . J. A M on etary H istory of
the U n ited States, 1867-1960 (Princeton: Princeton University
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[ 2] Andersen, L. C. “A n Evaluation o f the Impacts o f M onetary
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[18] Gramley, L. E. “G uidelines for M onetary P olicy— The Case
Against Simple R ules”. A paper presented at the Financial
C onference o f the N ational Industrial Conference Board, N ew
York, February 21, 1969. Reprinted in W. L. Smith and R. L.
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[ 3] Andersen, L. C., and Carlson, K. M. “A M onetarist M odel for
E conom ic Stabilization”. R eview (Federal Reserve Bank of
St. Louis, April 1970), pp. 7-27 (especially p. 11).
[ 41 Andersen, L. C., and Jordan, J. “M onetary and Fiscal Actions:
A Test o f Their Relative Importance in Econom ic Stabiliza­
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19 6 8 ), pp. 11-24.
[ 5] A ndo, A., Brown, E. C., Solow , R., and Kareken J. “Lags in
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[ 71 Brunner, K. “The Role o f M oney and M onetary P olicy”. R e ­
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[ 9] Chow, G. “Tests o f Equality between T w o Sets o f Coefficients
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[10] Corrigan, E. G. “The M easurement and Importance o f Fiscal
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[11] Culbertson, J. M. “Friedman on the Lag in Effect o f M onetary
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[19] Gram lich, E. M . “The R ole o f M oney in E conom ic A ctivity:
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tic and International Finance (N ew York: Federal Reserve
Bank o f N ew York, 1 9 69), pp. 37-49.
[22] Hamburger, M. J. “Indicators o f M onetary Policy: The A rgu­
ments and the Evidence”. A m erican E conom ic R eview (M ay
1 9 70), pp. 32-39.
[23] Hendershott, P. H. “A Q uality Theory o f M oney”. N ebraska
Journal o f E conom ics and Business (A utum n 1 9 69), pp. 28-37.
[23a] Johnson, D . D . “Properties o f Alternative Seasonal Adjust­
m ent Techniques, A Com m ent on the OMB M odel”, forthcom ­
ing.
[24] Keran, M. W. “M onetary and Fiscal Influences on Econom ic
Activity — The H istorical Evidence”. R e view (Federal Reserve
Bank o f St. Louis, N ovem ber 1968), pp. 5-24 (especially
p. 18, footnote 2 2 ).
[25] Laffer, A . B., and Ranson, R. D . “A Form al M odel o f the
E conom y”. Journal o f Business (July 19 7 1 ), pp. 247-70 (espe­
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[12] D avis, R. G. “H ow M uch D oes M oney Matter? A Look at
Som e Recent Evidence”. M on th ly R eview (Federal Reserve
Bank o f N ew York, June 1969), pp. 119-31 (especially
pp. 122-24).

[27] M ayer, T. “The Lag in Effect o f M onetary Policy: Som e Criti­
cism s”. W estern E conom ic Journal (Septem ber 1967),
pp. 324-42 (especially pp. 326 and 32 8 ).

[13] de Leeuw, F ., and Gram lich, E. M . “The Channels o f M on­
etary Policy”. Federal R eserve Bulletin (June 1969), pp. 47291.

[28] Pierce, J. L. “Critique o f ‘A Form al M odel o f the Econom y
for the Office o f M anagem ent and Budget* by Arthur B. Laf­
fer and R. D avid R anson”. In U nited States Congress, Joint
Econom ic Com m ittee, The 1971 E conom ic R e p o rt o f the P res­
ident, H earings, Part I (February 1 9 7 1 ), pp. 300-12.

[14] de Leeuw, F., and G ram lich, E. M. “The Federal ReserveM IT Econom etric M odel”. Federal R eserve Bulletin (January
1 9 68), pp. 11-40.

[29] Smith, W. L. “On the Effectiveness o f M onetary P olicy”.
A m erican E conom ic R e view (Septem ber 1 9 56), pp. 588-606.

[15] de Leeuw, F ., and Kalchbrenner, J. “M onetary and Fiscal
A ctions: A Test o f Their Relative Importance in Econom ic
Stabilization— Com m ent”. R eview (Federal Reserve Bank of
St. Louis, April 1 9 69), pp. 6-11.
[16] Friedm an, M. A P rogram fo r M on etary Stability (N ew York:
Fordham University Press, 19 6 0 ), especially p. 87.




[30] Warburton, C. “Variability o f the Lag in the Effect o f M on­
etary Policy, 1919-1965”. W estern E conom ic Journal (June
1 971), pp. 115-33.
[31] W hite, W. H . “The Tim eliness o f the Effects o f M onetary
Policy: The N ew Evidence from Econom etric M odels”. Banca
N azion ale del L avoro Q uarterly R e view (Septem ber 1 9 68),
pp. 276-303.

FEDERAL RESERVE BA N K OF NEW YORK

Publications of the Federal Reserve Bank of New York
The following is a selected list of this Bank’s publications, available from our Public Information
Department. Except for periodicals, mailing lists are not maintained for these publications. Delivery takes
two to four weeks. Orders must be prepaid if charges apply.
The first 100 copies of our “general” publications are free. Additional copies for classroom use or
training are free to schools, including their bookstores, and commercial banks in the United States. (Class­
room and training copies will be sent only to school and commercial bank addresses.) Others are charged
for copies in excess of 100.
Single copies of our “special” publications are free to teachers, commercial bankers, and libraries (pub­
lic, school, and other nonprofit institutions) in the United States and to domestic and foreign government
officials, central bankers, and newsmen. Additional copies for classroom use or training are available to these
groups (including school bookstores) at our educational price. (Free and educational-price copies will be
sent only to school, business, or government addresses.) Others are charged the full price for each copy.
G EN E R A L PU B L IC A T IO N S

(1971) by Thomas O. Waage. 44 pages. A comprehensive discussion
of the roles of money, commercial banks, and the Federal Reserve in our economy. Explains what money
is and how it works in a dynamic economy. (15 cents each in excess of 100 copies)
m o n ey

:

m a ster

or s e r v a n t

?

o p e n m a r k e t o p e r a t i o n s (1969) by Paul Meek. 48 pages. A basic explanation of how the Federal
Reserve uses purchases and sales of Government securities to influence the cost and availability of money
and credit. Recent monetary actions are discussed. (11 cents each in excess of 100 copies)
p e r s p e c t i v e . Published each January. 9 pages. A brief, nontechnical review of the economy’s per­
formance and the economic outlook. Sent to all Monthly Review subscribers. (6 cents each in excess of
100 copies)

SPE C IA L P U B L IC A T IO N S
e s s a y s i n d o m e s t i c a n d i n t e r n a t i o n a l f i n a n c e (1969) 86 pages. A collection of nine articles
dealing with a few important past episodes in United States central banking, several facets of the relationship
between financial variables and business activity, and various aspects of domestic and international financial
markets. (70 cents per copy; educational price: 35 cents)
e s s a y s i n m o n e y a n d c r e d i t (1964) 76 pages. A collection of eleven articles on selected subjects
in banking, the money market, and technical problems affecting monetary policy. (40 cents per copy;
educational price: 20 cents)
t h e v e l o c i t y o f m o n e y (1969) by George Garvy and Martin R. Blyn. 116 pages. A thorough dis­
cussion of the demand for money and the measurement of, influences on, and the implications of changes
in the velocity of money. ($1.50 per copy; educational price: 75 cents)

c e n t r a l b a n k c o o p e r a t i o n : 1924-31 (1967) by Stephen V. O. Clarke. 234 pages. A documented
discussion of the efforts of American, British, French, and German central bankers to reestablish and main­
tain international financial stability between 1924 and 1931. (First copy free; educational price: $1)

(1966) by George Garvy. 167 pages. A re­
view of the characteristics, operations, and recent changes in the monetary systems of seven communist
countries of Eastern Europe and the steps taken toward greater reliance on financial incentives. (First copy
free; educational price: 65 cents)
m o ney

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