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Working Paper 74-4

ALTERNATIVE RESERVE CONCEPTS AS
OPERATING TARGETS IN MONETARY POLICY IMPLEMENTATION:
SPECIFICATION OF THE STRUCTDRAL MODEL*

Glenn C. Picou

Joseph M. Crews

Federal Reserve Bank of Richmond

Presented at the meeting of the
Federal Reserve System Committee
on Financial Analysis, June 5, 1974.

The views expressed in this paper are those
of the authors and do not necessarily reflect
the views of the Federal Reserve Bank of Richmond.

I
Introduction

Monetary policy is concerned both with the ultimate goals of price
stability, full employment, and economic growth, and with the short-run
stability of financial markets.

Financial markets are important not only

for their own sake, but also as the mechanism through which the Federal Reserve
affects the economy generally. Since the ultimate goals of economic policy
are remote in time and causal connection from the everyday conduct of open
market operations, the Federal Reserve finds it useful to direct its attention
toward intermediate variables, or operating targets, closer in time and under
more positive control than ultimate goals.
Recent papers concerning optimal monetary policy have concentrated
on that aspect of the policy process involving the linkage of a single intermediate target with ultimate goals such as real income, price stability and
unemployment. Poole [21], for example, uses the LM/IS model to demonstrate
that whether the money supply or the interest rate is the optimal intermediate
target depends upon the relative stability of the LM or IS curve. Similarly,
Holbrook and Shaprio [20] use the Theil [22] approach and a small analytical
model to demonstrate that preference for a money supply strategy rests on
the stability of demand in the monetary sector relative to commodity demand.
These studies assume positive central bank control over the intermediate
target, and thus ignore the monetary policy process (i.e., the adjustment
of reserves and short-term interest rates to open market operations, the
discount rate, and reserve requirement policy) altogether.
Waud [23] has recently considered this aspect of the problem and
shown that (1) in the absence of knowledge of the parameters of the system,
predictable control over intermediate targets such as interest rates is

I
I

-2-

questionable, and (2) even with knowledge of these parameters, monetary
policy may very well work in a direction adverse to the attainment of given
targets.

These conclusions rest on the basic proposition that the monetary

authority is not able to distinguish between a stochastic disturbance and a
fundamental parameter shift on a current, ongoing basis.

Waud concludes that

intermediate targeting to achieve ultimate goals such as a desirable level of
employment may be "fraught with ambiguity at best and . . . very likely to be
inconsistent with the ultimate goal for which they are assumed to be a surrogate." [13, p. 31

It would be preferable, therefore, for the monetary

authority to concentrate directly on the ultimate goals.
These papers assume that the monetary authority concentrates on a
single intermediate target. In practice, monetary policy is conducted on a
"multiple target--range of tolerance" basis.

Following a single operating

target to enhance control over a longer-run aggregate may be justifiable
when (1) there is a stable multiplier relationship between the operating
target and the aggregate and (2) the noncontrollable factors influencing
the operating target are predictable with a reasonable degree of accuracy [15].
Given uncertainty regarding these factors, a system of multiple targets with
ranges of tolerance for each may be appropriate. Ranges of tolerance allow
for trade-offs among conflicting short-run targets, provide for possible
shifts in the multiplier, and allow the monetary authority to "look through"
the short-run indicators to the behavior of intermediate monetary aggregates
when necessary.
The present paper presents the results of the first phase of a
long-term study designed to evaluate a number of alternative intermediate
targeting strategies that could be used by the Federal Reserve for monetary
control. The project involves the use of linear quadratic optimal control,

-3-

using the solution derived by Pindyck [13]. In linear quadratic optimal
control, the policy maker is assumed to formulate his preferences for
various targets as terms in a quadratic preference function. He then
conducts policy so as to maximize this preference function subject to
the constraints of the economic structure, represented by a linear (or
linearized) model of the economy. Often the model is a reduced form of
some structural model.
In the present paper, a monthly econometric model of the financial
sector is developed that can be formulated in terms of alternative intermediate
operating strategies. Simulation in an optimal control framework over a policy
planning period under alternative strategies produces data that can be analyzed
to determine which strategy performs best in controlling the money stock.
Within this general context, the results being reported here concern
the specification and estimation of the structural model of the financial
sector to be used in these studies. From this structural model alternative
reduced form models will be derived later for the optimal control analysis.
The results of the optimal control analysis will be contained in subsequent
study papers.

Current Policy Procedures

In order to make the requirements of the model more specific, current
policy procedures will be described briefly. The spectrum of Federal Reserve
operating targets currently includes the Federal funds rate (RPF), the money
supply (Ml) and (Mz), bank credit, and reserves available to support private
nonbank deposits (RPD). The FOMC specifies a tolerance range for the growth
of RPD's and the monetary aggregates and a corresponding tolerance range for
RFF.

Given an RPD path for a two-month period assumed to be consistent with

I
I

-4-

desired Ml growth, the Desk provides sufficient nonborrowed reserves to keep
RPD growth within the acceptable range. If RPD growth appears likely to
exceed this range, the Desk provides nonborrowed reserves with greater
reluctance, so long as RFF does not rise beyond an acceptable level.

This

would cause borrowed reserves to rise, put upward pressure on RFF, and set
in motion the portfolio adjustments that would eventually tend to dampen
growth of demand deposits and the monetary aggregates [lo]. Thus, the intent
of the RPD approach is to bridge the gap between open market operations and
the monetary aggregates. Because information lags and random weekly fluctuations in the aggregates.provide unreliable signals concerning long-run
behavior, an intermediate operating target for open market operations is
necessary.
While RPD's are the first reserve measure used as an operating
target, there are several reserve concepts other than RPD's that are
a priori more suitable for this role.

Richard Davis [4] suggests that the

following variables may be feasible as operating.targets for the Open Market
Account Manager during the period between Federal Open Market Committee
meetings:

unborrowed reserves'(RU), unborrowed monetary base (BU), unborrowed

reserves less reserves against Treasury deposits (RU - TRR), unborrowed
monetary base less reserves ag,ainstTreasury deposits (BU - TRR), and free
reserves (RF). Unborrowed RPD's may be added to this list, since they can
be obtained by subtracting reserves against interbank deposits from (RU - TRR).
Total RPD's, however, are not included because of the interdependence of borrowed reserves and excess reserves.
Given the above operating target candidates, an econometric model
of the financial sector may be specified that is conformable to inclusion
of these targets.

Such a model is specified in the section below.

-5-

11

The Model

The financial sector is a complex of interrelated markets for
financial assets and debts. It is an important link between monetary
policy actions and those long-term interest rates that are important
determinants of economic activity in other sectors of the economy. To
establish the financial sector, we concentrate on the process by which
major participants in the financial sector adjust their balance sheets
to policy- and market-induced changes.
The mechanism that links monetary policy actions and real output
is a substitution process--the continual readjustment of actual asset
portfolios to desired portfolio compositions. Consider, for example, the
impact of a Federal Reserve purchase of Government securities. If the
securities are purchased from commercial banks, an immediate rise in the
monetary base and free reserves occurs, creating discrepancies between
the banks' actual and desired earning assets to reserves ratios. Similarly,
if the purchase is made from the public, its asset allocation is upset in
the direction of excess liquidity. Both commercial banks and the public
subsequently attempt to readjust their portfolios by purchasing financial
assets similar to those that were sold. There follows a chain of adjustments by participants in financial and real sector markets that eventually
affects real economic activity.
In order to specify a financial sector, we begin by considering
the balance sheets of two important money market participants, commercial
banks and the nonbank public. A third participant, the central bank, is

represented by its influence over nonborrowed reserves and the discount
rate, and jointly with the Treasury, by its influence over the total
quantity of publicly-held Treasury bills.
The public's assets are assumed to include demand deposits (DD),
time deposits (TD), certificates of deposit (CD), currency (C), Treasury
bills (QTBP), and other assets (DA). Commercial loans (CL), which are
assumed to be the major liability of the public, and other liabilities
(OJ.4 constitute the liability side of the public's balance sheet, which
,
can be represented as:

Public

The appropriate balance sheet constraint for the public is:

DD + TD + CD i QTBP + C - CL - (OA - OL) - NW

where NW is public net worth.

All of the variables on the left-hand side,

with the exception of (OA - OL) are explicitly determined in the model.
Net worth is assumed to be determined in the real sector and is thus
exogenous to the model.

Rather than attempting to measure household net

worth on a monthly basis, we assume that personal income (PI) is a (stable)
function of net worth and use personal income as a net worth proxy. We assume
following Brainard and Tobin [2], that the public's demand for assets and
liabilities are homogeneous in wealth, so that the public's demand for the
various balance sheet components can be written in the form:

-7-

Alp
- AT(rP, I)
PI

where rp is the public's relevant rate vector and I is a vector

of impact

variables.
This type of demand function is a general expression of the
linear asset demand function developed by Gramlich and Ralchbrenner [7].
Maximization of a simple quadratic utility function, with utility and
balance sheet components normalized on exogenous wealth, would yield
linear demand functions of the type presented above.
Commercial banks' assets are assumed to include reserves,
Treasury bills (QTBB), commercial loans (CL), and other assets. Reserves
may be classified by source--borrowed (RB) or unborrowed (RU)--and by use-required (RR) or excess (ER). Commercial bank liabilities include demand
deposits, time deposits, and certificates of deposit. The major elements
of the consolidated commercial bank balance sheet can thus be shown as:

Commercial Banks
RR
ER
EBB
OA

DD
TD
CD
OL

For the banking system as a whole, the following balance sheet
identity holds:

RR + ER + CL + QTBB + (OA - OL) = DD + TD +

CD

Required reserves are predetermined by virtue of the Federal Reserve
System's lagged accounting procedures; the remaining variables on the
left-hand side of the above equation are determined explicitly in the

model, as of course are deposit levels. With these deposits assumed to
constitute the banks' constraint on the demand for assets, we write the
banks' asset demand functiohs

in the form:
A?
~9

Af(rB, I)

where D is total deposits, rB is the relevant vector of own and competing
interest rates, and I is a vector of impact variables that cause portfolio
positions to diverge in the short run from desired levels. While only a
limited number of assets and liabilities are included in the model, we
specify demand and supply determinants in those markets that appear to be
most important in the financial .sector. But, as Tobin has pointed out [2],
such a model implicitly determines the behavior of the net composite assets
of both the commercial banks and the nonbank public.

At this point, we have

not investigated the implied behavior of these balance sheet components.

The financial sector to be developed below is driven by the
policy decisions of the central bank and Government as reflected in the
determination of unborrowed reserves, the discount rate, and the volume
of Treasury bills outstandsng.

The model is related to the real

sector

through the behavior of a number of predetermined variables reflecting
various aspects of business and household activity, which will be described
in the process of developing the theoretical model.

The Market For Bank Reserves

The equilibrium level of short-term interest rates is

assumed in

most financial sector models to be determined ultimately by the interaction

-9-

of the Federal Reserve's supply of reserves with the commercial banks'
demand for them [S]. Since the volume of unborrowed reserves (E) is
assumed to be closely related to Federal Reserve open market operations,
the true policy instrument, the banks' demand for total reserves (TR) in
essence is reflected in the demand for borrowed reserves. That is, since
total reserves equal borrowed plus unborrowed reserves:

TR = RU + RB

(1)
and E

is controlled by the monetary authority, bank borrowing determines

the demand for total reserves. Total reserves can also be described by
its uses, i.e.

(2)

TR = ER + RR

Since lagged reserve accounting procedures are used by the Federal Reserve,
required reserves are assumed to depend on the deposit levels of the previous period:

Since required reserves are predetermined, the demand for borrowing, which
determines the demand for total reserves, can also be interpreted as the
demand for excess reserves by the banking system. The interaction of these
supply and demand forces can be seen to determine free reserves. By
equating the right-hand sides of identities (1) and (2),

Z?+RB=ER+RR,

and transposing borrowed and required reserves, we obtain expressions for
free reserves:

I

-

10

-

FR 7 ER - RB or RU - RR.

(4)

The demand equation for borrowed reserves at the discount
window involves two hypotheses: First, the desired (equilibrium) level
of borrowed reserves is assumed to be a positive function of the implicit
equilibrium rate of return on reserves and a negative function of direct
cost of reserves [9]. The Treasury bill rate (RTB) is assumed to reflect
the return on reserves, in essence being a proxy for the weighted average
of rates of return on the banks' portfolio of assets. The discount rate
(RDIS) is the cost of borrowed reserves. The Federal funds rate (RFF),
representing the cost of reserves from alternative sources is assumed to
be positively related to banks ' desired demand for borrowed reserves [12]:

RBD f RBD(RTB*,RDIS*,RFF*)

Fundamental changes in the equilibrium relationships between
return on and cost of reserves would alter the desired level of bank
borrowing.

Such changes can be expected to occur only as banks adjust

their estimates of this relationship. The starred variables RTB* and
RFF* thus represent the best current estimate of equilibrium rates based
on available information concerning past and current financial conditions
(more specifically vectors of current and lagged variables).
Secondly, the actual level of bank reserve borrowing in the short
run will differ from the desired level because of the influence of certain
impact variables.

Banks consider their business customers to be valuable

sources of deposits, and are reluctant to deny reasonable requests for
loans.

If an unanticipated upsurge in commercial loan demand occurs, banks

are likely to accommodate these demands and finance the additional loans by

- 11 -

temporarily borrowing additional reserves or by drawing down excess reserves.
Similarly, short-term disequilibrium in the reserve market can be caused by
changes in unborrowed reserves resulting from open market operations, reserve
requirement changes, changes in float, etc.

Immediate adjustments to these

changes can likewise be expected to occur through changes in borrowing or
excess reserve positions. Given additional time, these factors may affect
other bank liabilities and assets, such as CD's and Treasury bills. Ultimately, desired borrowings might change as these factors affect market
interest rates through the financial markets. In other words, borrowed
reserves also serve as a buffer stock to accommodate unanticipated changes
in the impact variables such as commercial loans (ACL), unborrowed reserves,
and required reserves. Thus the actual level of borrowings is a function
of both desired borrowings (RBD) and disequilibrium conditions:

RB = RB(RBD,ACL,ARij,ARR)

(5")

- RB(RTB*,RDIS*,RFF.*,ACL,A~,ARR)

using bank deposits as a proxy for the banks' wealth constraint and scaling
RB by deposits, we obtain the borrowings function:

(5)

F

ACL A=
- RB(RTB*,RDIS*,RFF*,-'-'D
D

"RR>
D

To complete the specification of the market for bank reserves,
it is desirable to take explicit account of the Federal funds market. The
Federal funds rate equation is derived by Modigliani, Rasche and Cooper as
a reduced form function of free reserves and the discount rate [12]. It is
shown that the loanable funds available to the Federal funds market depends
upon the surplus of excess reserves available over reserve borrowing by banks

- 12 -

(free reserves) and the return from lending excess reserves (the Federal
funds rate).

Similarly, the demand for borrowing Federal funds depends

upon free reserves and the spread between the return from lending and
the cost of borrowing reserves (the Federal funds rate less the discount
rate). Equating supply and'demand and solving for the funds rate, a
reduced form equation for the funds rate is obtained:

RFF - RFF(FR*,s*)

(6)

where the stars again indicate vectors of current and lagged values.

In

general, we assume that the market for bank reserves adjusts rapidly to
changing conditions, so that the explanatory vectors include short lags,
if any at all.

The Banking Sector

The remaining assets in the banks' balance sheet are holdings of
Treasury bills and commercial loans. The desired proportion of Treasury
bills in the portfolio of commercial banks is assumed to be a positive
function of the Treasury bill rate and a negative function of the opportunity cost of holding assets in this form.

In the case of Treasury bills,

the opportunity cost is measured by the rate on Federal funds, the closest
substitute source of income:on reseme

funds and perhaps by the rate on

commercial loans (RCL). Since banks ordinarily make short-term adjustments
by borrowing reserves, rather than by selling assets, no impact variables
need be assumed in the demand for bank holdings of Treasury bills.

T

- QTBB(RTB*,RFF*RCL*)

Accordingly,

- 13 -

The other bank asset considered in the model is commercial and
industrial loans. The volume of commercial loans outstanding is specified
in the public sector of the model, below, as a public demand equation.
The supply, or rate setting, equation involves the presumption that banks
attempt to accommodate customer demands for loans whenever possible, and
adjust this loan rate in accordance with changes in the cost of loanable
funds or in the opportunity cost of lending. The rate on certificates of
deposit (RCD) serves as a measure of the cost of loanable funds. The
opportunity cost of lending is measured by the Treasury bill rate. The
ratio of commercial loans to total deposits serves as a portfolio balance
variable [8, p. 121. Both the portfolio variable and the interest rate
variables are assumed to be positively related to the commercial loan
rate:

(8)

RCL - RCL(RTB*,RCD*,

In addition to the supply equation on commercial loans, a bank
asset, a number of rate setting equations must be specified for bank
liabilities. The implicit rate paid by banks for demand deposits (the
value of services provided to holders of these accounts) is assumed to
change sufficiently slowly so that a rate equation need.not be specified.
The rate on time deposits, excluding CD!s, is assumed to be exogenous.

The banking sector is closed by the banks' supply function of
CD's. The rate banks desire to pay for CD funds can be expected to be
positively related to loan demand and to rates on competing instruments.
Banks are assumed to view security sales as increasingly undesirable as
market (bill) rates rise, and to seek funds more aggressively through the

,
I

I
I

CD market.

- 14 -

This process can continue so long as the CD rates remain below

Regulation Q ceiling levels: At that point, banks can no longer pay the
rate that they would otherwise be willing to pay given market condition
and loan demand.

Nevertheless, trading continues in the secondary market,

and we choose to represent the banks desired rate on CDs by the secondary
market rate.

Since banks cannot pay the desired rate, the public will of

course tend to run down their holdings of CDs as they mature; we will incorporate the CD runoff phenomenon in the public's demand for CDs.

Accordingly,

the secondary rate on CD's is a positive function of the commercial loan
to deposit ratio and of the Treasury bill rate:

CL*
RCD = RCD(RTB*,D)

(9)

The remaining bank liabilities are discussed as publicly held
assets in the section below.

The Public Sector

The balance sheet of the public sector, as discussed earlier,
contains deposits and currency as assets and commercial loans as the
single specified liability. The public's demand for deposits interacts
with the banking system's ability to supply deposits, as constrained by
the policy-determined level of unborrowed reserves, to simultaneously
determine the deposit quantities and the rate on CD's.

The supply of

currency is assumed to be completely elastic and thus determined by the
public's demand for currency.
While demand deposits and currency together constitute.the money
_

stock, their demand equations will be specified separately. Demand deposits
are determined in the process of bank adjustment to changing reserve and

- 15 -

market forces; currency is basically demanded by the public for transactions purposes. In each case, the basic Siirmof the equation is
H - k(r)P, where M is the quantity o:E money demanded; k is the Cambridge
cash balance or money/income ratio,

expressed as a function of's vector

of interest rates on short-term financial assets; and Y is the level of
income 1121.
Again incorporating starred notation to indicate the adjustment
process, the demand for currency is assumed to be related to the rate on
Treasury bills, serving as a proxy for other competing types of short-term
liquid assets. The wealth constraint is incorporated by expressing asset
demand as a proportion of the wealth proxy, income. Thus the currency equation can be expressed as:
C
- = C(RTB*)
PI

(10)

Similarly, the demand for checking account balances is written as:

z

(11)

= DD(RTB*,RTD*)

The demand for time deposits (excluding CD's) at commercial
banks is assumed to depend upon a vector of own and competing rates.

In

addition to the rates in the two preceding functions, the CD rate is also
included in the demand for time deposits:

- TD(RTB*,RTD*,RCD*)

(12)

The growing
bank

of liability

requires specification

chief instrument

demand and
of deposit.

as a

of

functions for
banks' supply of CD's

I

- 16 -

was discussed earlier as the secondary market rate setting equation.
The public's demand for CD's is a typical asset demand function, being
a positive function of the CD rate and a negative function of the rates
on competing short-term finknclal assets.

In addition, the occasional

rise of the CD rate above the Regulation Q ceiling requires that we
account for the resulting runoff in the volume of CD's.

This phenomenon,

presently only of historicaJ importance, since the Regulation .Q ceilings
on CD's have been .removed,is explained by the introduction of a dummy
variable QT.
Q - 1.

Normally Q = 0, but when RCD is above the ceiling ZCD,

Then T is initialized to 1.0 and increases in index fashion as

long as the runoff continues. This enables us to capture historical
runoffs as a demand phenomenon in the same equation with the normal
structure of the public's demand for CD's.

Note, however, that the other

explanatory variables continues to offset CD demand. At any time, the nrevailing CD rate is actually an average of rates paid by banks.

Thus

there will be some banks that can issue CDs at less than the averape rate.
In addition, there is probably a lag in the-public's recognition of the
rate discrepancy between CDs and other similar instruments. Consequently,
market factors continue to act on the public's CD demand, with the offsetting
report of the Q ceiling growing stronger over time. The competing

rate

vector is assumed to include the Treasury bill rate and the rate on commercial paper, and personal income serves as a wealth proxy:
(13)

z

- CD(RCD,RTB,RCP,QT)

The total quantity of publicly held Treasury bills is assumed to
be a joint fiscal-monetary policy decfsion, with the distribution of this
total determined by the interaction of bank and public demand for bills:

qTBT- QTBB+QTBP

- 17 -

The quantity of Treasury bills desired by the public is considered
to be a positive function of wealth and the bill rate, and a negative function

of the opportunity cost of bill holdings, i.e., the return on competing shortterm assets.

The rates on commercial paper and CD's sewe

as competing rates,

and again personal income serves as the wealth proxy:

(15)

y

- QTBP(RTBi,RCP*,RCD*)

In our simultaneous equation environment, either equation (7')
or (15) may be renormalized to provide a rate setting equation for Treasury
bills.

(7)

We choose to renormalize equation (7'):

RTB = RTB(y,RFF*,

RCL*)

The identity (14) may then be employed to determined the quantity of
Treasury bills held by banks.
In order to complete the public sector, it is necessary to
specify the public's demand for commercial loans. The demand for loans
is related to a vector of competing rates on alternative sources of funds,
to the cost of commercial loans, and to a shift variable representing the
impact of real economic activity on the demand for funds, in this case
inventory accumulation (AH). The inventory variable is included to reflect
the proposition that, at the margin, all inventory investment is financed
by borrowing from commercial banks [S, Appendix, p. A3).

The competing

rate vector includes the commercial paper rate and the corporate bond rate.
The commercial loan demand function is written as:

(16)

CL - CL(RCL*,RCP*,RCB*,AH*)
PI

I

- 18 -

The final behavioral relation in the model is a reduced form
equation for the commercial;paper rate.
presumably by the corporate~sector,

The supply of commercial paper,

is a function of a loan demand variable,

the paper ,rate, and rates on competing financing methods:

CPs * @(RCP,RCB,RCL)

617')

The demand for paper is a function of rates on competing short-term assets
and the paper rate:

(17")

CPD = CPD(RCP,RTB,RTD)

Since net commercial paper holdings are assumed to be zero for the nonbank
public, it is not necessary'to specify a quantity equation. The resulting
reduced form rate equation can be expressed as

(17)

RCP - RCP(RTB*,RTD*,RCB*,RCL*)

The model contains 18 endogenous variables and thus far only
17 equations have been specified. The model may be closed by the definitional ,identityexpressing total bank deposits as the sum of certificates
of deposit, demand deposits and time deposits.

(18’)

D-DD+TD+CD

As specified above, the model contains 18 equations. There are
commercial bank demand equations for borrowed reserves, required reserves,
and loanable funds through the CD market (the supply of CD's).

Public

asset demand equations are included for demand deposits, time deposits
. (excluding CD's), currency, Treasury bills, and commercial loans.

Supply

equatjons include the public's supply of loanable funds through the CD

- 19 -

market (the demand for CD’s). Reduced form rate setting equations explain
the Federal funds rate and the commercial paper rate. The Treasury bill
rate equation is a &normaliaed bank demand for Treasury bills.

The sector

is closed by six identities, with al.1policy and real sector variables
being considered exogenous*

- 20 -

III

Estimating the Model

The model is estimated using monthly data over the twelve-year
period 1962-1973. The various sources of the data are described in the
Appendix.
Both seasonally adjusted and unadjusted data were used in the
estimation of the model.

In the case of the deposit equations, total

private deposits at all commercial banks were felt to be the appropriate
dependent variables. These data are seasonally adjusted. In addition,
a breakdown of time deposit data into CD's and time deposits other than
CD's is estimated only for all commercial banks on a monthly basis. The
only monthly data available on member bank time deposits is inclusive of
CD's.
In computing member bank reserves, it was felt desirable to use
unadjusted data, since bank reserve requirements are based on actual (unadjusted)
deposit levels. Furthermore, monetary authorities generally deal with unadjusted
reserve data in making short-term policy decisions; thus it was desirable to
formulate the reserve equations on an unadjusted basis.

Consequently,
two

equations were estimated to allow transformations between seasonally adjusted
commercial bank deposit data and unadjusted member bank data.
The regression equation in Table II-l, using O-l seasonal dummies,
relates unadjusted member bank total time deposits, including CD's, to total
adjusted commercial bank time deposits.
A similar equation, shown in Table 11-2, is estimated to obtain
private nonbank member bank demand deposits, seasonally unadjusted from
private, adjusted demand deposits at all commercial banks. Once member

- 21 II - 1

Time Deposit Transformation

TTDm

=

8.9145
(7.5520)

+

.7486 TTDE;
(129.9105)

-

.S604 S1
(.5519)
.4608 S2
C.4529)

+

3.3121 S3
(3.2595)
.0415 s4
(.0408)
.0299 s5
C.0294)
.3682 S6
(.3624)
.3762 S7
(.3703)

+

.2976 S8
(.2929)

+

.1440 sg
(.1417)

+

.0591 Sl()
(.0582)
.9466 Sll
(.9311)
1.0292 s12
(1.0117)

R2

-

.9957

SE

=

3.6559

DW

=

2.1260

P

=

.2851

- 22 II - 2

Demand Deposit Transformation

=

22.0542
(18.9537)

+

.6238 DD;;
(84.0514)

+

4.5497 S1
(17.1105)
.7715 s2
(2.8895)
.5603 S3
(2.1098)

+

1.0330 s4
$3.8934)
2.5697 S5
(9.6878)
1.3528 S6
(5.0997)
1.2271 S7
(4.6241)
2.3642 S8
(8.9063)
1.0409 sg
(3.9201)
.3295 Sl()
(1.2404)

+

+

R"

-

.9973

SE

=

.8904

DW

=

2.3084

P

s

.6326

.4603 Sll
(1.7316)
4.1730 s12
(15.6886)

-

23

-

bank deposits are known, Government demand deposits and net interbank
demand deposits are added to obtain total demand deposits subject to
reserve requirements:
DDNSA, T = bDNSA, P + DD&%
MB
MB

G + D#$.

IB

In the simulations of the model, commercial bank deposits DDCB,
mcBf

and cDcB would be determined by their respective demand equations.

The corresponding unadjusted member bank deposit components would then
be determined from the equations in Tables II-1 and If-2 to obtain private
nonbank deposits subject to reserve requirements. Government deposits
and interbank deposits at member banks are then included to obtain total
deposits subject to reserve requirements.
Finally, the commercial loan demand equation is estimated using
seasonally adjusted data, although it enters the borrowings equation
unadjusted.

In simulating,the model, therefore, the seasonal adjustment

equation shown in Table II-3 is used.

Estimating the Distributed Lags

In developing the theoretical model, the behavioral relationships are generally expressed in terms of vectors of current and lagged
independent variables.

Such lags permit desired portfolio adjustments

to occur over time in response to changing market conditions. Empirical
estimation of such lags is complicated by the presence of high correlations
among explanatory variables, as well as by the correlations among the
various lagged values of a given explanatory variable.

Ordinary least

squares analysis of lag coefficients under such conditions will yield
unbiased parameter estimates, but the sampling variances obtained are

- 24 II - 3

Commercial Loan Seasonal Adjustment

@A
CB

P

-

.0130
(.1387)

+

1.0003 CL;;
(998.1836)

-

.9964 Sl
(9.0912)
.8771 S2
(7.9894)

+

.0857 S3
(.7818)

+

.0857 S4
(.7821)
.2562 S5
(2.3373)

+

1.4019 S6
(12.7896)
.0317 s7
(.2893)
.8986 s8
(8.1979)
.0155 sg
(.1414)
.5157 Sl()
(4.7036)
.2909 sill
(2.6531)

+

R2

=

.9998

SE

=

.3926

DW

=

1.9573

P

= - .0798

2.3088 S12
(21.0512)

- 25 likely to have an upward bias, and could lead to inappropriate rejection
of hypotheses.
In our model, specification of the structural equations indicates
the need for distributed lags, possibly relatively lengthy, on several
interest rate vectors.

In order to increase the efficiency of estimation

in our analysis, we have taken the common approach of using Almon polynomial
lags to estimate the distributed lag coefficients.
Almon distributions were estimated using either second or third
degree polynomials. No end point constraints are imposed. In the absence
of a priori information warranting such constraints, their imposition could
result in misspecification. Thus it is desirable to leave the end points
unconstrained and allow the data to determine the end point coefficients.

Specification of the Structural Equations

The choice of optimal lag specifications for the explanatory
variables is a decision problem for which no systematic statistical procedure
is available. The problem is particularly serious in the case of a structural
model, since specification errors are transmitted throughout the system. The
use of polynomial lags further complicates the task of estimating the structural
equations, since misspecification of the lag parameters.(length, degree of
polynomial) can lead to serious bias in the estimates of the distributed lag
weights.
In the case of fixed independent variables, The11 [17, pp. 211-2151
has suggested the use of the minimum standard error as a reasonable criterion
for selecting from among a set of specifications most likely to include the
correct specification. A strict application of this procedure in selecting
the lag specifications in this model, however, did not yield a set of equations
that satisfied a priori sign requirements. Moreover, several equations

-

26 -

selected in this manner were characterized by unexpectedly long lags that
were apparently responsible for unreasonable simulation results.
The empirical equations presented in this s(tudywere consequently
obtained in the following manner.

Each structural equation was estimated

over the entire lag space from 0 to 9 periods. This requires beginning
the estimation at the lag length equal to the degree of the polynomial,
which is an OLS estimate and allows for the possibility of no lag [16, p. 131.
Then the minimum standard error criterion was applied to those specifications
that generally satisfied reasonable a priori requirements in order to obtain
the behavioral equations.

In those equations for which the lags were expected

to be quite short, straight OLS estimates were obtained directly.
In several equations, distributed lag effects, although properly
signed, appear with rather large standard errors. Polynomial lag techniques
cannot, of course, entirely eliminate the multicollinearity problem, and the
relatively large sampling variances no doubt reflect to some degree the
remaining influence of the collinear independent variables. However, no
attempt was made to remove these seemingly insignificant explanatory
variahles

from the equations, since they did not appear to adversely affect

the simulation of the model.

Moreover, specification error could occur if

independent variables are omitted on the basis of upward biased standard
errors resulting from collinearity among the independent variables.
Empirical Results

Bank reserves and the Federal funds market.--In these two equations,
it was assumed that bank borrowings at the discount window and in the Federal

- 27 -

funds market adjust rapidly,to changing market conditions. Thus only
contemporaneous values of the explanatory variables are included in the
OLS estimate of these equations.
The regression re,sultsfor bank borrowings are presented in
Table 11-4. All of the coefficients have the expected signs, and with
the exception of the change in commercial loans and the discount rate,
relatively small standard errors. The Durbin-Watson statistic is rather
low, however, and indicates that the sampling variances could be subject
to downward bias.

Experimentation with various lagged specifications of

the borrowings equation failed to alter the estimates. The approximately
equal coefficients on ARU and ARR indicate that free reserves could be
used as the explanatory reserve impact variable in the borrowing function.
Table II-5 presents the results for the Federal funds rate
as specified by Modigliani -- al.
et

The reduced-form model performs very

well; in fact the strong relationship between RFF and the discount rate
is somewhat surprising in view of the rather weak relationship between
RDIS and member bank borrowing. This result probably indicates that RDIS
should not be included in the equation for member bank borrowings along
with RFF.
Experimentation with lagged specifications of these two equations
failed to produce any indication that the bank borrowing does not adjust
rapidly to changing market conditions.

Deposits.--The public's demand for the various deposit categories
are expressed as a proportion of the wealth proxy, personal income (PI).
The initial formulation of the demand and time deposit equations also
included retail sales as a transactions variable.

However, estimation

- 28 II - 4

Member Bank Demand for Borrowed Reserves

R%B
-zc
DCB

.0106 S1
(1.3417)

.0246
(.4057)
+

.0102 s2
(1.2756)

.0261 RFFt
(3.0973)

.0079 EL
(.9055) DcB)t
(

+

.0002 s3
(.0299)

.0104 RDISt
(.6105)

-

.0012 s4
(.1791)

+

.0044 s5
(.6254)

+

.0081 S6
(1.0159)

+

.0193 s7
(2.4725)

+

.0171 S8
(2.3151)

+

+

.0023 Sg
(.3138)

t

+

t

+

R2

=

.9445

SE

=

1.4156

P

=

.9087

.0113 Sl()
(1.5916)

.0228

DW

.0182 RTBt
(2.1242)

.0062 Sll
(.8896)
.0119 s12
(1.2465)

I

29 -

II - 5

:Federal Funds Rate

RFF

=

-

1.7970
(2.8477)

R2

=

.9852

SE

=

.2456

DW

=

1.9607

P

-

.9119

.7206 Fs
' (4.7647)

+

1.4678 RDIS,
(12.0466)

- 30 -_.
of the equations produced coefficients on retail sales that were not
different from zero.

It appears that the wealth proxy PI is also

capturing the effect of transactions demand on depeeits, and these demand
functions were re-estimated without the retail sales variable.

The regression

results of the two deposit equations are presented in Tables II-6 and 11-7.
A priori, it would appear plausible that the impact of the time
deposit rate on demand deposits would be distributed over time.

However,

distributed lags on RTD produced no significant relationship. Since it
was felt that savings deposits were a close and important substitute for
demand deposits, a nonlagged version of the demand deposit equation was
estimated in order to allow for this substitutfon effect.
The time deposit equation itself reflects a fairly lengthy
adjustment period of up to eight months.

The coefficients are of proper

sfgn, but in the case of the bill rate RTB and the own rate RTD, the
relatively large standard errors of the lagged relationships again suggest
the influence of the collinearity remaining among the explanatory variables.
In both equations, and particularly in that for demand deposits,
the strength of the constant term Indicates a strong relationship between
deposits and the wealth proxy PI.

Currency.--As in the case of the two deposit equations, retail
sales were initially included in the currency equation, Table 11-8, but
It appears that the income variable is picking up the effect of the transactions demand for currency, as indicated again by the strength of the
constant term. The only other variable included in the equation is the
Treasury bill rate. Although currency obviously cannot be considered
- as a close substitute for Treasury bills, it is necessary to include

I

- 31 II - 6

Public Demand for Demand Deposits

P
,DDCB =
PI

+

25.9038
(29.2092)

.7714 RTD,
(4.0852)

-

.0954 RTBt
(2.0063)

.0305 RTB,,l
(.5642)

.0937 RTBtw2
(2.3540)

.1077 RTBtw3
(2.4903)

.0861 RTB,,4
(1.5699)

.0423 RTBtv5
(.8404)

c

R2

z

.9955

SE

=

a1499

DW

=

1.7974

P

=

.95qo

=

-.2650
(2.6829)

- 32 II - 7

Public Demand for Time Deposits

time
period

TDCB
PI

m

30.0224
(5.4397)

.0068 RTBt
(.1135)

.0292 RCDt
(.5076)

+

t-l

.0284
(.4136)

.0308
(.7356)

+

.5652
(1.7349)

t-2

.0515
(.6670)

.0330
(.8236)

+

.3767
(1.3541)

t-3

.0718
(1.0468)

.0356
(1.1237)

.0580
(.2197)

t-4

.0851
(1.4137)

.0386
(1.8882)

.4197
(1.2264)

t-5

.0870
(1.3242)

.0419
(2.2223)

.3890
(1.1881)

t-6

.0732
(1.0047)

.0455
(1.9633)

t-7

.0396
(.5980)

.0491
(2.2826)

+

.0181
(.2517)

.0528
(1.3981)

-

.4253
(1.0276)

.3566
(2.3570)

t-8

c=

R2

.9954

SE

.1431

DW

1.9091

P

.9887

-

.1882 RTDt
(.7732)

+

.3533
(.5318)

f

.6166
C.5960)

I

- 33 II - 8

Public Demand for Currency

C
PI-

6.2295

+

.0013 RTB,
(.1198)

(58.5834)

.0067
RTB,-1
(.5660)

RTJ$-2
.0150
(1.1762)

.0087 RTB,,3
(.7041)

c

R2

-

.9899

SE

=

.0372

DW

- 2.1393

P

=

.9500

=

-.0291
(1.8298)

-

34 -

a variable that represents the sate on competing assets yielding a
positive return.

If a change in market rates causes the public, 6or

example, to increase its total proportion of interest-bearing assets,
there should be an indirect effect on the public's desire to hold
currency. in fact, the bill rate does display a negative three-month
lagged impact on currency holdings, although the impact is small
relative to the bill rate's impact on other assets.

Treasury bills.--In this model the bill rate and the distribution
of bill holdings between commercial banks and the public are determined by
two demand equations and the identity equating total bill holdings to the
bank and public holdings.
Commercial bank demand for Treasury bills is assumed to be a
function of the bill rate, the Federal funds rate, and the rate on
commercial loans. The equation was estimated as a rate equation, and the
results are shown in Table 11-9. The quantity.variable has the expected
positive sign with a relatively small standard error, indicating that
bank holdings are sensitive to changes in-the bill rate.

The commercial

loan rate also displays a positive distributed lag relationship, over
three mOnths, with the bill rate.

It is reasonable to assume that as

commercial loan rates rise, Treasury bill rates will have to rise also
to encourage banks to maintain their holdings of Treasury bills.

Binally,

the bill rate displays a very strong positive relationship with the lagged
Federal funds rate.

It thus appears that banks interpret movements

in the funds rate over time as an indicator of monetary policy

I

- 35 -

II - 9

IBankDemand Equation
Rate on Treasury Bills
time
period
.3402 +
(.5787)

17.8764 (y)t
(3.0017)

+

.3654 RFFt
(5.4914)

+

.3614 RCLt
(3.2505)

t-l

+

.3321
(4.5960)

+

.1842
(1.6590)

t-2

+

.1452
(2.9425)

.3562
- (3.3794)

t

RTB

=

-

t-3

.0719
l.9672)

t-4

.1959
(2.8885)

c

R2

=

.9770

SE

=

.2126

DW

-

1.8988

P

-

.7859

=

+

.5749
(4.8338)

+

.1806
(1.6799)

+

.3790
(2.4713)

- 36 -

direction, and adjust their portfolios accordingly.

It is of interest to

note that a relatively long distributed lag on Federal funds was obtained
in the monthly financial sector model developed by Pierce and Thomson
118, p* 261.
The public's demand for bills, as shown in Table 11-10, behaves
as expected. The commercial paper and CD rates have a negative impact
distributed over five months , although the standard error on the distributed
lag impact of the CD rate suggests that the collinear interrelationships
among the rates are blurring the separate impact of the CD rate on public
bill holdings.

Certificates of deposit .--Because of Regulation Q ceilings imposed
on CD deposit rates by the Federal Reserve Board in the past, the empirical
estimation of the CD market required some method to account for the CD
runoffs that

occurred in 1966, 1968, and 1969, when secondary market CD

rates rose above the Q ceilings. Our approach is to assume that banks
have a desired CD rate, which reflects overall loan demand and the rate
on competing money market instruments, proxied by RTB.

This desired rate

is assumed to be reflected In the secondary market rate on CD's since it
is the rate banks did in fact pay when Regulation Q ceilings were not
binding.

We assume further that given bill rates and loan demand, the

secondary rate is the rate that would have been paid in those periods
when Q ceilings were in effect.
The secondary CD rate is presented in Table II-11 as a function
of the bill rate and the counnercial
loan variable 2.

The lag space

search was carried out for this equation using a second degree polynomial;
thus the estimates in the table are OLS estimates. A third degree poly-

/

- 37 -

I

II - 10

I

PubliciDemand for Treasury Bills

time
period
t

=

+

.0800 +
.0045 RTBt
(3.0277)
(7.6751)

-

.0079 RCPt
(3.9065)

+

.0021 RCD
(1.2033) t

t-l

+

.0047
(2.5820)

.0051
- (2.8912)

t-2

+

.0039
(2.6090)

.0031
- (1.8005)

.0014
(.8588)

.0013
(.7917)

+

.0008
(.4683)

.0019
(1.1831)

+

.0043
(1.8187)

.0017
- (1.2903)

t-3

+

.0034
(1.8744)

t-4

+

.0043
(2.5348)

t-5

t-6

+

.OOlO
(.5537)

-

(:%)

.0004
(.4375)

c

R2

I=

.9158

SE

=

.0032

DW

=

2.3851

P

-

.9446

=

+

.0208
(3.8317)

.0124
- (1.7224)

.0025
(.3332)

- 38 II - 11

Bank Supply Equation
Rate on Certificates of Deposit

RCD -

-1.2245
(1.9103)

+ .6663 RTBt
(30.3013)

+

-

& *

.5576 RTB+l
(7.2575)

.0208 RTBtB2
(.3136)

1.2031
(22.1257)

R2 = .9866
SE = .2058
DW = 2.1407
.6055
P =

-1.2436 (CL)
(.3371) D t

+6.1496 (CL)
(1.72226) D t-1

-1.1130 (Ct\
(.3047) D t-2

3.7931
(1.1296)

,
- 39 -

nomial was originally applied in the lag search but no reasonable results
were obtained.
The impact of Q ceilings are explicitly introduced in the public's
demand for negotiable certificates of deposit.

It is assumed that the CD

runoff is essentially a demand phenomenon. Over time, public awareness
of the differential between allowable CD rates and rates on other instruments
will reduce their desire to hold CD's at below market rates. Thus, the
variable QT is introduced in the demand function; Q = 1 when the secondary
CD rate is above the Q ceiling; Q = 0 otherwise. T is reset at 1 each time
Q switches from 0 to 1, and is indexed through the runoff period.
The public's CD demand function is presented in Table 11-12. The
interest rate variables both have significant distributed lag effects with
the expected sign.

In addition, the runoff variable QT also appears with

a relatively small standard error, and seems to support the hypothesized
behavioral relationship. The Durbin-Watson statistic is quite low, 1.1266,
so it is quite possible that substantial specification error exists in
this equation, which could be producing gratuitously large t- statistics.

Commercial loans.--The bank supply function for commercial loans
was estimated as a rate equation, as shown in Table 11-13.

It was assumed

that banks generally accommodate, to the extent possible, customer demand
for loans and adjust the loan rate according to variations in the cost of
financing those loans and to the opportunity cost of competing assets, in
this case Treasury bills.

The estimation results bear this out as the

only significant distributed lag effects are obtained for the CD rate;
although the Treasury bill distributed lag coefficient is negative, it
has a relatively large standard error. While some positive relationship

- 40 II - 12

Public Demand for Certificates
of Deposit

time
period
CD
PI

+

.0889 RCDt
(1.5476)

.0742 RCPt
(1.1276)

t-l

+

.1536
(2.4217)

.1021
(1.2183)

t-2

+

.1864
(2.8622)

.2152
(2.6211)

t-3

+

.0171
(.2910)

.1468
(1.7122)

.4460
(2.6289)

.5384
(2.9544)

t

=

7.3335
(6.4070)

-

.0171 QT
(2.3879)

c

R2

=

.9894

SE

=

.1220

DW

=

1.1266

0

*

.9900

=

- 41 -

II - 13

Bank Supply of Commercial Loans
Rate Setting Equation

time
period
t

RCL

=

.2261 RTBt
(3.1875)

2.0760
+
(2.9713)

+

.0181 RCDt
(.2610)

t-l

.0374
(.4319)

+

.1794
(3.3564)

t-2

.1425
(1.5675)

+

.2156
(4.1482)

tG3

.0299
(.3408)

+

.1709
(4.5253)

t-4

+

.0893
(3.5986)

t-5

+

.0151
(.5549)

.0077
(.3087)

t-6

+

t-7

c

R2

=

.9837

SE

=

.1682

DW

=

2.2401

P

=

.8396

*

+

.0162
(.0775)

.0652
(1.4776)

+

.7460
(4.6243)

- 42.m

between the banks' loan portfolio variable F

and the loan rate might be

expected, the lagged value (and contemporary value In another space search)
entered the equation with a quite large standard error. This suggests a
supply function that is completely elastic with respect to the loan rate,
so that the loan rate is completely determined by the cost of funds.
The public's demand for commercial loans is presented in Table
11-14. The results indicate that the demand for commercial bank loans can
be explained by inventory accumulation and the rate on commercial paper,
an Important source of nonbank financing. Although the RCL effect shows
up properly signed, it has a large standard error. The corporate bond
rate however appears improperly signed,
The overall picture is a lo&n market in which the commercial
bank loan supply function is perfectly elastic, with the loan rate determined primarily by the cost of loanable funds at the margin, in this case
the rate on CD's.

Thus commercial loans are essentially demand determined.

The public's demand is apparently inelastic, and reflects mainly the behavior
of the real shift variable AH and the alternative cost of funds in the
commercial paper market.

If in fact banks do accommodate loan demand by

issuing CD's, this would explain the absence of a significant Treasury bill
relationshSp in the supply equation, since no substitution on a relative
cost basis would be involved.
It is necessary to point out, however, the tentative nature of
these results. The commercial loan rate is a manufactured variable that
reflects mainly the behavior of the prime rate. The failure of the
equations to indicate a significanb relationship between CL and RCL may
simply reflect the fact that the prime rate until relatively recently did
not accurately reflect the true cost of commercial loans.

- 43 II - 14

Public Demand for Commercial Loans

time
period
CL:;

t

a

14.1404
(15.6799)

PI

-

.0894 RCBt
(.9420)

.1208 RCPt
(2.8228)

t

+

.0243 RCLt
C.4390)

+

t-l

+

.0227
(.3724)

+

.0091
c.2671)

-

(:;::;)

+

+

+

.0025 AHt
c.1623)

.0869
(1.2398)

t-3

t-4

.0210
(1.1009)

+

.0283
(1.3722)

.0094
c.2563)

+

.0304
(1.4611)

.0575
(1.1685)

+

.0330
(1.6795)

+

.0752
(1.2265)

t-2

+

.0418
(2.5627)

+

.1570
(1.7548)

t-5

c

=

-

R2

=

.9924

SE

=

.0996

DW

=

1.9517

P

=

.9834

.9971
c.6584)

+

.1794
(1.7800)

- 44 -

Commercial paper rate.--The reduced-form commercial paper rate
equation, estimated using a second degree polynomial, is presented in
Table 11-15. The equation indicates that commercial paper rate movements
will closely reflect movements in rates on competing short-term instruments
and the commercial loan rate.

In addition, it is quite sensitive in the

short run to cthangesin the bond rate.

- 45 II - 15

Reduced Form Commercial Paper Rate Equation

RCP

=

-

.4355
(1.7713)

+

.3130 RCBt
(3.0785)

t

+

.3760 RTB, +
.4021 RCDt
(7.2302)
(8.1394)

t-1

+

.0615
(1.3936)

.2938 RCBt,l
(2.9606)

time
period

+

+

.0140 RCLt
(.2325)

.1659
(3.9202)

+

.1257
(3.3604)

t-2

.0719
(1.3765)

.0267
(.6167)

+

.1404
(3.2219)

t-3

.0242
(.5099)

.1756
(3.6026)

+

.0581
(1.8999)

t-4

c

+

.2047
(3.4071)

.1212
(2.1484)

.5460
(3.2744)

.3657
(2.9118)

R2 =
. SE-

.9952
.1170

DW = 1.7381
P *

.6919

.2171
(2.1653)

- 46 -

IV
Some Simulation Results

In order to indicate the tracking ability of the model and any
remaining problems in its specification, an in-period simulation is reported in this section. This simulation, which covers the period 1972-l
to 1973-12, uses actual values in the lag structure, rather than computed
values, in order to demonstrate the model's single period estimating
characteristics. While the results reported in Tables IV-1 to IV-11 cover
the entire simulation period, the first six periods are used to get the
model "on track," and should not be evaluated too closely. The first
period, for example, represents only one iteration, not a convergent
solution, and is used merely to initiate the Cochrane-Orcutt autoregressive
correction scheme.
One equation, the ratio of Treasury bills held by the public
to personal income, generally over estimates in the simulation period.
Rather than use an intercept adjustment, we chose to leave the variable
exogenous and examine the tracking characteristics of the remaining equations.
Reserves borrowed by commercial banks, Table IV-l, exhibit a
relatively large root mean squared error (RMSE). Two Instances of negative
borrowing occur. The first, in 72-5, results from an abnormally large fall-off
in the solution values for commercial loans (Table IV-4). The second results
from a large fall in required reserves in 72-11. Each of these variables
enter into the borrowings equation as impact variables, and the impact, in
these cases, is too severe to keep borrowings positive. This equation needs
more work to prevent negative borrowings.

1

- 47 -

The fall-off in required teserves in 72-11 is reflected in a
number of interest rate variables in the model.

As shown in Tables IV-2,

3, 5, 6 and 7, these rates fall substantially in this period.

The chain

of causation appears to flow from required reserves to borrowings to free
reserves to the Federal funds rate to the Treasury bill rate, and on to the
other rates.

The chain continues through the commercial paper rate to

commercial loans, as shown in Table IV-4.

In the following period, the

Cochrane-Orcutt correction scheme brings the model back "on track." A
similar pattern, again caused by fluctuating required reserves, appears
in 73-11 and 12.

In the remainder of the period, these equations track

reasonably well.
The remaining variables presented in these tables are monetary
aggregates.
very well.

Both time and demand deposits at member banks appear to track
Both the Ml and M2 equations are also performing well.

Conclusion

The model, as specified and estimated here, represents the first
step in an optimal control study of monetary poliay.

Further development

of this model to specify the Federal Funds market, to linearize the model
and to run the optimal control experiments will be presented in forthcoming
papers.

IV

-1
._ .., ._
.

_

-

.

MEMBER BANK BORROWINGS AT THE DISCOUNT WINDOW
__
-_.. ---.--. -__-_.
--.- .--- _....___. .__ _ - ..___
---.
..- .
....__.. ____._.
-.----.-.-- .__
Predicted = +
Actual8 - *
_.
._
__
.._._
.,
_
._ -_.
_
.., _ ._._
PREi).

’ ACTUAL

ERRCR

PERCENT

._

1400.36b.

0.300
0.309
0.195
0.326

0.020
0.030
0.100
0.129

-0.119

0.110
0.100
0.230
0.390
0. SC0

a.396
0.411

0.361
0:344
1.579
-0.627

iJ.55r)
0.610
1.050
1.165

1.461
0.976
1.633

1.593
1.858
1.721
l-760

1.473
1.4bY

2.015
L.a.26

1.789
.2.055

2.322
2.280
L.52!3
1.699
0.921
2.197

2.143
l.bbl
1.467
I. 399

1.298

SUM OF THE SQUARES
NUMdER
OF OaSE%VATIONS
ROOT MEAN
SQUARE
DEVIATION

__

0.280’
G.279
0.095
0.206.
-0.229
-0.004

,TIME

.._.-.._,..

RAN&

__.
i

. . . ..-

930. 180
95.284

.

171.392
-208.057
-3. 839
_....

0.181

78.537

-c.o.29
-G.
196
0.529
-1.237
0.411
-0.189
0.040
-0.385
-0.252
0.229
0.037
0.271
0.137
-0.233
0.452
-0.478
0.699

-7.395

-36.328

..

,_._

_

+

_.______.__ ...?._
r(r
+
_,__

.-km..- -

_

*

- -... .- 9 ' .
,,.
_

LO

. _.._ _.
.+

2

-

--. l

-20.699
-14.622

,._....

-..---_-.

13

_

.___. _.,.,_. ;;

.._.-.
-

r(i

._... - .

_

.

..----.._..-..
_

-... . ...
.
..__.
_..._
i..

..-

..-

_.
.

+

6.378

___._

69.

_,___.

20

: ____.__._

264

.___.. ---.
_.
-.--__

=

3.9d2530
24

:

_- ____.__.__..__

___...____

-

______

__..__._

- .____.

_,.

..,^

I_.._ _

.

.
*+

:

.

*

.

--

.

*
*

+-

l

1.

. .._.._L !‘+m.-em ..;-.-.-..-

.

__,.
~_..._ .__
_
+

+.

*

_ _

.__

+

*

f

21
.
22
.- ~.
._
23
.__.. _ __ 24 ____.;

.*
.

-.

13.225
-12.494
29.443
-34.187

__.

9’ ‘..

..-.-.-.

_,_.___..._____._._____.._ . ..__._._.
-

_,.,

--

+
**

__-..-._.._
-.I-.-_-__
,._--...-_..

. . . . _.,____: _____...__.___..,

l
.

.*

+
,: _._._..___.
. ..__.
._._________...~__
____ ~___________.-- .+
.

15
_ _.. .____...
16
:17

2.062

_

-

_...

l

l

12.848

.-

...__..- - .:.
.
._
.

*-

_.___ ,_ _.

___... ._

._

.

.

a

14

._

+

,

__-- - .*.-.

_.. ___ _..

_._________-_ .._ . .-.. -

._, ._ - ._. ..__
.._._.__. +
*

_ .+.*.

._.-

l

*+

3
*
..,_ _______ 4 .e..-..-,w-._....
5
.
._____ _, ____ 6 ...-. _._I_____..
7
.
3
.
_

2.542 .__..

-

.-.--

-...-.

.

.
+

**

..

.--.-..

l

*

.
.

+

_

--- --- .----..---..---.--.
.-. .-....__..._..__ ..__... ___ -------- .-.- ----. --- -..
-_--.-

0.407356

_

-

- -._. - .--.... -.--

. - --.- --.-

__ __-

--

__. ._. ~
.,
,.__, .-_ -_....
--_- .-_ ..-- ...-_----.-_.-- _ .---.

_..-.

. -

.

,_

.._.__.

_

____,.

.

-

.

.

.

.

_.-

.---..“.

. --

..-.--.-.

..__ __._
_

,_

.

-

.-..

_---

_,__
- .-. _ ._ .- ..

-

^

--...

-..

. .-

.

-

.-

-....

-

-.-..-_...

.. .___. . .- -

.--

.-

-

.
_.

,.

-_-. --. .._.

_ _.___._

...___._ -.-._ .-_.. . ..-- -.-_

.. _._ _. -..- .,.-.-,.. ..-._. .-..---.--.-.. --...
_

_ _. _- _. ..-

__._- .---

__..
_._. ..-_.. .-. ...-_. - ._- __.__ - .
-

._.

^

_ _.
._

6

.

_ .._-.___._
..______-.._ _.__ ._... _____,..___..
_
_
__
_..___.._-_._-._.._
.._ ._

..-..

..-

2.322

__..____.__ _ ---.---. .....e...-..*__ .-..-_-~_-- -2
__
._..
..+...
--_.

sib.210
-202.708
39.097
- Lb. 223

_

i0

.Y

.

.

yO.bi7

* .. . .---.,.-..-... - -. _...

_... .____.
.

.

.._

._.-_-

._...

.

-

.

.-..-...

.-

.--.-..--

.-._

.

..-

.

. .

IV

-

2
..

Actual8

-

* ..

__. .,__.__-.__ ._.__-. -_ ^. ..__.._. .--.-

::
_

,__ __ _.... .
._. .._ ... .
.

Predicted - +

-.-.

_ __ __.-..__... .-___
--

. __ _ . . .- - _-.--

.-_..__ _.---.-.--.
.._

.

.

-. ...- - --

---.... - .._.___. -....-.

........
.

..-

'PRE6;'

._
.. --. _,

_. _

..

,.

Ai;TUAL

.._ _
4.671
3.905
3.401
4.316
3.939
4.195
4.717
4.782
4.810
5.385
3.Y14
5.323
6.345
6.924
7.150
7.011
7.908
a.455
9.670
10.961
10.415
10.750
9,344
10.645

_. ..-.
_
3.500
3.290
3.630
4.170
4.270
4.460
4.550
4.800
4.070
5.040
5.060

5.330
5.Y40
6.580
7.030
7.120
7.840
8.490
10.400
ld.530
10.7110
lO.OiO
10.030

9.950

SU41 OF THE SQUARES
NUMiiER
OF OBSERVATIONS
ROOT MEAN
SQUARE
DEVIATION
---

_.

ERROR

..PERCENT

.

1.171

0.615
-0.429
-3.154
-0.331
-0.265
0.167
-0.018
-0.060
0.345
-1.146
-0.393
0.105
0.344'
0.060
-0.109
0.068
-0.035
-0.730
0.461
-0,365
0.740
-0.686
0.695
=

_.--

._

T.IME',_,...___:
_ .

__.__._____.

___ _. 'RANGE

.__.

..3-2W:i.O

-- .lO&:,-

5.234

0.839

__

__

... -

.-.__

____,_

__ i:

. . '.'

.._. _..-.

. . - ..

,t
33.462
1.*
+
18.708
._.
2 .**
_
.._.
.-_. .
-11.191
3 .+
*
.
++
-3.686
._, .4 .* __....
_
__
,_
_. .
t
rt
-7.753
5.
*
-599x3
. ~___..
.
.6 -0 . ..-. _. + .._
_-.
_........_..
_.
.- --.. .
*t
3.666
7.
t*
-0.370
,_ _
'8
c--. _..- _ _.
_.. _
_
4
-1.237
9.
* t
6.839
10
-..
._
*
+
-22.654
11
.
*
_7.373 --_..~_ 12 : .._._,. . _...
_.. .
-_... t
.
.
*+
1.765
13
.
14..l ...._ ._ ,.._....
,.
,_._...
_._

.-I* 537
0.863
-0.417
-7.023
4.394
-3.384
22..2..
7. 395 .__._-_._._
_.
-6.840
23
.
6.980
___..__I

._

.

.. ..-.. -

_ .

__ _ _._..

.-

l
.

.

.

.

.

.

__.

.

.

.

_._ ?.- +

*+
15
.
..
..-..I
16 ...... ~_
.
.
._...___._.. - _..__
.___.,,,r,
_
_..._._ -...P.
17
.
.,&..18 ...- . . . .
,. .._....._.
_
._..
.
19
.
fy.. .:
._.-...
-..- .._.. _
..__
-.--.

0.511859

24

.._........__-. -- .________.__....__,_ ._. ..-_
. .._._
.-.

..

. . "1

..
.
.
.
.
.

.

.

.

.-._ _.__.

*+

.

*
*

+

.

t

*
*

*
+

-

.
.

+.
*r
+ .
-

.

6.287992.‘-

=
=

.___

- -__......

_ .___._ .___ .__
__

-.
.-

__.__

_...

__._

. _..,_...__ ..
-..
_..

__._..

_,

.._ -..

.-

'

_ _._.

_
.

.~_

IV - 3
THE TREASURY BILL RATE

PRED.

..--

ERROR

ACTUAL

3.d79
3.5i6
3.058
4.314
3.941
4.254
4.217
4.162
4.413
5.002
4.363
5.755
5.294

3.400
3.200
3.700
3.700
3.700
3.500
4.000
4.01;3
4.700
4.703
4. uoo
5. LOO
5.400
5.6OC
6.590

.

6.011
6.207
6.500
6.732
6.965
6.397
9.402
a.968
a.548
7.009
a:646

6.ibo
6.360
7.190

8.010
8.670
8.290
7.220
7.83G
7.450

lb-592
6. SOD
9.D84
5.434
4.038
-6.097
6.427
-9.095

12.850
-1.967

.._ 12
13

_...

.._

l

+.

_- .._

_...
l

L

.
..*-

*

,__._.

‘.

._.._._

.-..

+.

--

.._.

+ ‘-’
*
._.. -- + . .._.-_ _-_-..._* +

_.

..-.

_-_._I._.

-

.

-.-__

..-...-.

*
.___I__._..,.. _.__-..._._. “_

.._

.-...

...-...

-.---.

.-.

^

_

_._.. ._. _.._ _

.

_...

-.

. .

l

..: . -._..__...._-.__. .-.__
.
;
._.
._
_.

.*.

.- _,.....,.”

.t .,.,,

._

-.

-

.

--.- - --.-

..-. .---

-,

.

_.

,...,
._

__.

..-_

.+

_..

__..-

_..__.. ._-......._
_

-.

0..

.,._..^_,_

.

- ._._. -9

-_-......-.
__

.

+ . . .

*

. - .__ ._ -.

.-

.__.

.t

.+

*

*

.-...

_.-._ _.

+

--

+

*~.

l

..__- _... _.

_.._.
_

..-.

.

_. _. +
_

*

.-.

+

.

.

0.564644

-.
24

_ _.._.

_.__. -. __ _

.-^

. . .

-

.

.

.

. .

.-_--

.-

. .

-....

-.-.-

--.I

. ..-.

..-....-.-.-_

-

_-

_._.--.

-

__.....,___’

I . . ..---..

.-... L.

- ----

-,.-.

-....

..-

_._...__

.-..

__-.-

-.--...-.

.-_

.--..

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-.._

--2

---

..-.

-..--...

.-.-..---.

_--

-

----.

.--

._...

_ ._.

.._.

. I

._.-

.

__-

-. ._.

.-.-L

-

“..__.

..,

-...-.

..-_._.._.C....._

__.__....

_-...

-

.

”

_

..

.._ _- ____.

.-_

----_

. . .

.

-

-....

.-.

--.

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_...

-

._..

-

--..

_

.._..

_-

.._

..--..

-

. _,

.

.

..

.

--

.

.._.

..-.
.._

.

..-.

-.....

__._,

.

..r.

.

.

_

_ . ..._...

____ -

..__.

-..-

____.___
“‘..
_....-..

-‘.

;;;-

-::

-.-

----

.--v-e

-w-v-

:-

------

_

.

__

__

_.

. .-....--I..

._

--_

___.

.-._

.

..-..

-.

.._.

_--_

-.-..

.

-...

.

-. _.-...._-.- ...__--r..-- ..-.. ___.- - .._._ .._..__. ..- --__-- ----.-.

.-.

.

. ...”

. ..--_

._

._.
___.

-.-

?*

*

.

l
.

*

...

._

.
_

*

_

.

.

.
.

.___-__ _.._....__..._- ._-.-_
-._ .-.-.. -_

_.. . -..

_ -...

..,

.

_._

..-

.

.

. L?!...

...-__-- .__....

.

.

+*

:.-.

-.

.
..- -0

. . ..--....

--.
.

__

_.

._

___,

.,

_:_ ._

.

..- -. -.- -..---. __._.. .,.
_-_-.. -..-

_._-s.1

- .*

_.

_..

.-.

!.

3

..-

.

.._._,.._ .e.
24.

7.651735

_.

_

.__. _..
___.._,
+*
____ _._. . _ 8 _ ._. + - --.. ---._-_+
*

-.__‘-._

22

..__~
__

16.055,.

..-

.

_...

.._.

.

.*+

.

..a

_._.---..-

..- -..~._.

_

.

.

23

18.389
y10.489

_..

..-

.*

.
. . ...--.....-.
. .
. ._..
.
..---...-.-..,.
.

::
17
10.
19
20
2L

-.;.

._

_

_. ._____,_.__.

.9..402

*i
,.

._. .
_

.__..

1.921
3.841
5.848
-3.133
4.828
8.447
8.422

-----

-

_ -.-3,058.X!

+

.+

._ .._ 14

7.348

-...

.

l

3
.-.. .._ 4
5
_. _ ..,.. 6
7
,.....
8
9
_,. 19
._... .
11

-.-_

-

*

2.

9.888

-.

-_

.
.-

___

__..

1.

-17.356

=
=

,

_.-.......-__. ,-.

14.102

=

-

Predicted - +
_
_._.. .__-.._I..___
.
._.

T.I?E ..__ ._._
.__^._._____ RANGE

PERCENT

0.479.
0.316
-0.642
0.6.14
0.241
0.354
0.217
0.162
-0.287
0.302
-0.437
0.655
-0.106
0.411
0.117
0.240
0.372
-0.225
0.387
0.732
D.698
1.328
-0.921
1.‘196

SUM OF THE SclUARES
NUMdER
OF OdSERVATiONS
ROOT MEAN SOUARE
DEVIATION

.

Actual8 - *
.._..._._..... _
._..
.,..

_.,.
.

.

_..

_I

-----

-.- .- -- . .

IV-4,
.._

115.626

115.200
116.100
118.400

_ ._.. ERROR

._

.,_.,
__ ..uTJfiE.

__ PERCENT

Pradictod - +
.
-.
_

__. ,,,, Actual - *
,.
_

.-.-.--__..._
--.._
ACTUAL...

_

COMMERCIAL AND INDUSTRIAL LOAND AT COMERCIAL BANKS

..

PRED.

_..

^-

-. .. - ._. -.. ._- ..
.

_..-

..

_.
--_.. _.
- ..-_ .~...

--.

__ ,_._.__.__ .____.
____
s.WJGE. ...WS.~oO To....I640331

.
.

-

.. .

.~.

...._ . .

..-.._
_.

_

-.

li6.1i9
117.467
121.316
119.487
122.252

i22.927
123.505
124.713
1.26.574
125.alq
132.272
129.460
134.979
137.620
i41.326
i44.631

-. ._

146.542
i5 1.711
152.795
154.a09
i53.529
155.161
164.331

120.100
120.800
123.200
12'2.300

0.369

0.426
9.029

0.025

0.627
1.305
0.513
0:774
-1.790

-1.313

~__..
-0.948

127.600

3
_. ~ 4
5

0.413
0.615
-1.403

1.716 ,_

125.800

.:

-0.788
1.429
-1.087
:0.770
0.512

-0.933

122.2015
124.200

" .-' '1
2
.._.

..,

~

_,,__
___,_,..
6

.*+
. *

l
.

.

+*

.

* +
'C.4'

..
.
.

l ,_-.,
.-....w..-.+
.3 ,_

7.

8

1.~8

.

-.

.
,__

_

,___,_,,
___,,,,_..,._,._._,
_,_,,_,,_
_,

_

.

4
l

._

*

+.

.
.

.

.._.._._
_

,_-.-_..

_ _
_

-

.*

.

..,_
-

__..

.
.

.._ _-.__ _...
132.000

154.600
159.900

.
.

..-1.187
-2.880
-2.129
-1.208
.-1.235
-0.058

-1.621
-4.080
-3.074
-1.709
-1.858
-0.089

136.600
141.700
144.400
146.430
150.400
151.830
152.230
154.100
i53 .300

_..

.

..~__. :

.
.

16.. :... _.__ - :__
__ ..__

_

__

.__

*

.+.

17
19

.

+ '4

W..:

_-_

.

.

-..

+4

_..
_.__.__
-- .-..-..---.--.-, _...__._.....
-- .__...__ .__

21

0.460

0.709
0.229
-1.439
4.431

.-

15

.-._.. 0.391 .- .-..-. -... 20 _.._ .__..._._
- ..-.....-:.
-,-

0.595

:

._ ..-

..~...

4
4+

. - . .._ _

..__.

_
..0.149 -_... .._.. 2.2 .. 1.. ..._.._..__._,_--....._____._._...._23
.

._

____....24

.
L
l

4+

.

4
+*

-0.931
2.771

_

.
.

-.,

4

+*

_

_. __._ -...
-..

SUM OF THE SQUARES
NUMt)ER
OF 08SERVATIOhS
ROOT MEAN
SQUARE
CEVIATION

=
1

77.343506
1.795173

24 ___-.__- _.._
1-v
.- .

..-. -

~
.. ..._. I-I-

.- .
.-

-.-

..

--_-_-___

_____._____

____
_-_._..-.....

._-._ ...._I_._ .__ __

.-.- --.. - ---.---.---.--.__.

.._..-_ ._..--_.._...._-.._-..._.
-.._

_._..___..

.
..

__.....,.-._,__.-,-.

. .. ._..__.. .._._.
- __,. .._
. -

_____

6

_.

_.

_.__._ .._

._..

.,

-__ .__.
,_

._

_ __.
_...-. .

. ..

:

-__---. --c--. - .- .- ...

.-

_--_.._..
_._....._.. - .__. . . .
-.
_ _

IV - 5

._ ._

PRED.

.

6.i39
5.603
5.437
5.a62
5.514
...-...-. 5.828
5.945
5.929
6.140
6.345
6.109
6.782
6.502
6.781
ci.ayl
7.334
7.593
7.794
8.821
9.355
9.543
.9.353

Acrusls

-0.097
-0.343
0.182

-1.709
-5.936

6.220

-3.124
-0.161
2.015

7
8
9

_ _..

2.290
-5.284
-1.179
0.314
-2.673
0.471

.__

10
;a..

__.

.14
15
.-._ . 16
17

1.511
- 5. 6 3 8
0.241

_ _4
_

.
.
.-.-.
.

+
;__ ___. _

.._ _

4

_.__ - ____

.-.x1:

4+

.

.-.

.,.

._ w.... 8 _ ..-~__I...._.._.-....._._I m-w.-.+.-.-- *
.,_~, 1
- iv.-1Y.
.

2.578
6.030

_ __ 20
21

:..

-

___.._

._-

._ ..-._.

-6.913

23

.._

.

___._._____,._____ .._.____..._ ,_ _
_____. _ 22 .._^Z

-2.466

*

-..-

-

_

5

,__..___.___

-

__.___.....

-..--__--

.

. .._.- -...-

.---’

_.

.

__

_

__

24.

_. ._._

-.._

__.-_----__-__--__

- _

.

_

_ .,

.

4
4

.

4

.

:

+-.

.
.

_

_..____.._______

A-..

.-.

_ _ __-.

--

._. ___... --.

_._

0.270505

=

._.-

.__.___.__l___.ll__l__

__,__________,__-

-.---

.._____

-.-

._.______-

- . -

-

-_..-.

--..

.--

..-.-..

---

__..

. . _ __. ._ ._-__ -- ----__.-

__.. ..-_.

-.

--I

--.-.

- .--_

_.__ ..- ___.__..__.-.
-

-.-

--.--

.-.--------

_. .__...._ - ._-.-.. ----._. ._.._..
.

-....-

..

_____.__
___.

_.

.

__ _,.

-

.._

._.-.

--

___

--

.

..-

____

..- -

- ..-

_.

-.-..

.

--.

---..-

__.._..

_- .._...---.._ .._ ..-.-...--

..___ ___

-.-- .-. _. _-_. .___....- -... --_. -..

_--.--_-.-.--

-.. ., -- .

-

_

- -_.

.- . ..._..

. -... _

-.-

..-.-

_____..______..

--- . _

-...
___. __._.___,_.- _--- _ ___ ._ ._ ._ _ -_. _...._
._
..-.-

.-.

.

._
-..----. - __......_. .--- -

--..- -;. _---

-_. ..-__.__ .

.._._

_

.-

.--.-

.~

. ..__.__._ _.____. ____
._
.___
_
_.__^_ -- .._. _.- --..-. -

_
_

+

2.783.-.--____._.
.24-...,

. >

..-

+
+

--..-

__.-.____.L.___________

_..

+

4

._.-

-”

..

1.756155

=

.._ .-

*+‘.”

,.

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

5

0.594

-_

_

.
._.

..

_ ..__.-.
.6..

. .._.-___..

SUM Of
THE SQUARES
NUMBER
OF OBSERVATIONS
ROOT MEAN SQUARE
DEVIATION
. ._ ._
_
_...
-.
_

.,_ . ..-.

_ .

____ .- .._ _.._ .-..
_.._..

.4

-1.381

-0.341
0.152
-0.078
0.021
-0.185
0.034
0.113
-0.466
0.021
0.235
0.543
-0.237
-0.695
0.280

6.450
6.630
6.580
6.760
7.080
7.300
7.480
8.260
8.800 _-'
9.120
9.OGO
9.590
10.360
10.060

..I ---... . . ., -.-..

.

+
_-,..._ .__

3

3.199
-3.769

-0.082
0.035
-0.i91
-0.010
0.125

*

.-.
.

10.340.

.TP.

,_ 5.437

RANGE

_ __ _. .
._
1 .
..-. -..z. .-+*
._-

5.668

-0.2ib

Predicted - +
- *
,.___,___,
__ ,.
.__
,__ I
. - - -. -- -....-

_. _
: _.

.-TIME

0.329

5.810
5.700
5.780
5.680
5.730
5.910
5.910
6.120
6.150

9.365
iO.340

PERCENT

ERROR

ACTUAL

THE RATE ON COXMERCXkL LOANS
_.- -..
.._.
_

-

. “...- _-.- -..

_

--.

_._ .__
_

_ _- _ -. - .

.,.._
.__ -.
-

-. .-

._. .

.-..

-.

. - - .-

-- . .

_

_ _.

.-

Iv - 6
SECONDARY MARlCETRATE ON CERTIE'ICATES DEPOSXi
OF

.._.._
-_-.-- .-. ,. - -.-.---... .._. _...

PRED.

_-

4.492
3.688
3.394
4.743
4.293
4.564
4.569
4.751
4.806
5.800
4.918
5.1!i5
5. c49
6.370
6.641
7.180
7.573
7.751
9.502
10.S86
10.700
9.943
7.788
10.307

..,__. . ..

ACTUAL

*

_--

_ _.
Pre&cfed I +' ..-.. - ..I..._ . _...
.
..-.
.
.
. _.-.I-.._
.._
_------ -.--"Actuals. .*.--.
-.
.. .
. ..
_

__...._,__ ..___ RANGE
_ __.
PERCENT._... ...TI.ME-v.._ __

ERUDR

4.200
3.750
3.800
4.500
4.430
4.400
4.850
4.650
5.150
5.200
5.iOO
5.250
5.600
6.200
t.s5cl
7.320.
7.500
8.210
9.610
lO.YOO
10.440
9.090
Y.210
9.330

.'..

0.292
-0.062
-0.406
0.293
-0.110
0.164
-0.281

"

6.950
-1.649
-1oit97
6.508
-2.499
3.717
-5'.802

-0.344
0.600
-0.282
0.905
-3.101
0.170
0.091
..-it.izo
0.073
-0.459
-0.108
-0.214
0.260
0.853
-1.422
0.977

--

=
=
=

.__

._ _. ,___

-6.488
11.53Y
-5.417

.._-

*

+

., _.

‘,

-.

_.

-

_.-

. .

+‘.

sy.‘.

*

++

.
.

__
_
. ..-_.-._.~.._~..._.__..

..

’

*

++

.

..-.

.

.._

_

*
.'
.

._,_

' .._ .._...
i*

*.
.- - *
.

._

-..

___.-.___._-

* .*r

t+

-.

_ ._._ _ ~...___ _"..._- . .._-.-._-_.

____....__
-

._. .

_.

.-_ ._..

.
--

*

_...

-et

*

___ ._...
- ~

._

.

.

_

..22.-.

. . .. . _ z.

_.

r __.______I._____.__

._______.._.._._...._..__.

--

.._
‘_1_

--

_..-_

.___

+*.

*+.

.
.

,..

-.

___.. _ . _.-. .v--**.

.

.,

.

.

+

____.__._ - ______...__-__.__
-

.

.

.-

-...

9..-__ ._..__.
__ +
_ ..___.__?...
_

..

.._. &.
17.
.
.__ ..,. : 18..e...--.
1')
.

._..-

.

._

.

.

_ 14 .- .
15

.

.
.

*+.

.--- ..__....._.____
+*+*

..__ --.I6
_

_

-..--

.

;f

-...

-1.985

2.488
9.378
-15.439.
10.476,

._.

+G

. --. ._--__
.

11

-1.807

....10.800

.

8

-._.

_

.

_-:.
.._...._

.

-- ___. 10'

17.245

2.739
1.385
,-1.647
0..977
-5.
590
-1.125

l

T'?

.
.

+
.

9

2.164

0.101

SUM OF THE SQUARES
NWOER
OF CbSERVATlONS
RiiOT
rtEAN
SQUARE
DEVIATION

_.

*
.
. .+* ._.
.+
*

1
__. 2
3
4
5
~ 6
7

..w...w3t394

..-..-..
.,-m.
..__ - ._
..-.

*

.
.

+

*

+

4

_:

+

l

5.952572
24

.

.-...-.--.-_-_-.-.-__-..

__.___...______~____..~______~__.._____~____._.__

._

_

.

0.493320

- -_

-

,

..- .-._.---

. -- ..-_

___

_-. .__ -. ^_

. .

-

-. . . ..

...--__.-.-._-

_l.-l__.__

._ .- . .._ . .. _.__.
I_.._

___.

___, -....: .

.- .__

.-_...

.. .

..- -....- _

,.-_.. .-.___,_. .-___ ..-.-__. - -.

-

.-.

. .

-

___
____... _

_

THE

.1

_-...
ERROR:

ACTUAL

4.81i
3.7;4
3.561
5.3G5
4.401
4.694
4.712
5.024.
4.990

-*----

__

5.851

.-.

4.569
6.208
5.484
6.550
6.639
7.283
7.608
7.S26
3.460

iO.803

_-.-.

---

9.185

.

10.210
IO. 230
8.920
8.940

9.0&O

-- _.__
Wuals-~
*--.*

PERCENT

0.7j4
.-0. 216
-0.609

. ..__ .-.J-I!E

.___

-5.
503
-14.594

0.054
-0.138
_.

0.551
-0.381
0.758

_ _ _.

___

3.56J..-TQ

____. 10.803

__ _
_

_...

__

.____..,_

l

_._,“_.__

_

.

+*
_

* __.__ -

..
.

c ._.____._____
.

11

13.902
-5.122

.

-0.296

.:.

-0.211
0.330

-3.085
5.304

__.__ _.

l

---.

-- ..

__..”-- .._....
.
. -

_.. . _ __- _ ..__ _

.

-.

-

__ ____. _.

-.*.
-..-

+*

..-.”
.*.---

.._____.____.__.

+*

.

.-.---

. ..-.

...

.._ _-..- -.-

:

_..

__.. t--.~“.-.-...-.---.
__

_
._,

._._ -- .:-.--... __..

_ -.

. .._-.

.--

_....

l
.

+
_.

.

0

5.?.

__._.,.__,,_

_.

.

.

12

..?

..__.-..-.

10 ._“. ___.__________

_ _____

.-.-... -.--- ..-- .-.. -...---.--...-.

_

.

8.
9

___. _

._.. .-_

..

_.____
---_-.. - .-..--

.._ -*

.

*

.

.__ ,...F

.-...
+ -.... .
.

13

.

14
15

.

.

r _..___._.._.__..__. ___.__._ _*-, ._______ ?. +;..*.
.

l *

.

-

_

.

.

.

._

- ..-.-... ..-.-

._.

.

_

0. 143
0.338

2.005
4.656

_ _.. --.

-4.552
3.055
2.787..
_ _-0.890
7.614
-16.059

.--O-364
0.280
0.285
o.i)91
0.679
-1,436

1.723

_

_

_ .__ __

=

__._ __________

> ______
.

- ..__. ‘$

19
.
.
-20 ... . .. .. .._--...__......-...
__ ,., ._____..__
-.
Ll
.
.__,___._ 22 ._._e_.____..._______.____.___..__.,____
-.
23
.

18.973 __I____
,_ _

____.._
_.__ ._ -

_

_ __.._.

___.- _._

.._

.-.

-

-

._

._

-

-.

_..

-...

_ _

. ..___ __^
*+
-__-..

*.
_
.

+

;

. +

.__
__-_

.
.-- -

.

.

.

.

* +
*+
-

l
.

0.

.,.-.

.

*

2%-.
..__.

_. _..--“~-.---

_. . _ - ..- +

+* _

_ _...

._.

6.768571

=
=

.-16-e.
17

____._._ 18...-,-, ..________
.,.:
____
__I., . e-o__-._..__..
._-_t

.-

SUM OF THE SQUARES
NUXaER
OF OBSERVATIONS
ROOT MEAN SQUARE
CEVIATION
...
_ ^.

,..
.

__. ...“. -.

4

..10.392
-7.249

,RANGE

+

.

.,4
5

._.________

4. 232
-2.916

-. ..---. .--..
-.
----.

.
1

__...

1. 174
-2.855

0.204
-0.150

__,

,__ ______. f- ._..L? .Lf...8ey-.+

‘15.835
-2.423

_ ..__. _.. ._.
.-_

-*_.-?redicted 3~ -_____-___.._____. _.._ -_ __.. _.-. ._._
-- ___ -___ - -.._.._
.._.
__._._

____._____,__

__--.---

17.980

0.725
-0.109

5,300
5.250
5.450
5.780
6.220
6.d50
7.140
7.270
_ 7.990

lC.495
10.321
9.599
7.504

4.aaO.3.930
4.170
4.580
4.510
4.640
4.850
4.820
5.140

RATE ON COMMERCIAL PAPER

0.604434

24
.

..

_.”

__ __.

.-.” .” .- ..”-*-..-*-

__ .- _.._..__ .__ _____.__ __....__
. .-

___.._

*.__.- .-. __*__-....------

_

.._
. ... ..-“-

-.

.-

,._.. I..““. **-..

..-

.--_.

. “....

..-

.

,.,:,

_

. _.

L

.,,

,,

:.‘.‘.

IV - a

.

.

,,

.I.

.;,

._ __ -

_

-.~.-

,._..

_..

_

_

..^ -

ACTUAL

.

241.732
239.052
240.666
__ 244.483
244,559
_.

._
-

_

;:... __,. ,_...,____ . i
.___,
I..
.

i43.248
246.353

248.964
250.075
254.036
253.244
255.196
256.258
253.199
260.351

255.236
260.805
263.930
268.586
267.219
26G.698
269.576
262.948
273.691

235.500
23d.200
240.500
242.030
242.J30
244.200
246.600
247.YOO
249.500

251.300
252.600
255.700
256.700
257.9OC
258.100
259.400
262.400
265.5OC

_

" '6.232
0.052
0.156
2.483
1.75s
-0.952
-0.247
1.064
0.575
2.736

Zcb.400

266.200
265.500
266.5GO
Zbt).

800

273.400

SJCi GF THE
S3LJ2\ltc:C
iJ~:.l&EC. OF t)aS:RV.C.T ;G:JS
KNIT
?EA\iu
S,JUAXct
CEViLTION

2. 645.
0.358
0.069
1.926
0.724
-0.350
-0.100
0.429
0.230
l-089
0.255

_.

0.644
..-0*504

_

-0.442
1.2VV
2.251
-4.164
-1.595
-1.562

-0.

=

8

__..b-691

l

4

.

_,.__ .__,

,..12-

. l _._._____..

_

._..,.I,_.__,_
,.^
__I_.__.,..___

_

._

.
.
._
-..
-.... .
-. -..
-...--.-_..-.- _........- -.
.
.
-

-.. ._..--.-

.-.-..

.--

.--.-

.-..

-

. .-.

.

.

*'

+

19

*.

.

,.. ,..20 . . .. _.,._....._^
. ..
21
.
_. 22
23
.
l

.

_. _____,_._._
._

____..
._...__._._....._ ._...
_

._

..-.-

.- ..-. . .
-

9: +

-

+*

__.

.--..--

+

.
*

..-.

..-. _._
__.._._...._...._
16.. L....
-..+
*
~_ ______________
,,..m+ *
17
__.
.+. *
18
__._._.,__ ,..~_.._,_
._I_
._.____.__.__.,.__
._^, .,.__ ..:....-.......
___

0.383
-0.302
1.155
-2;177
1.217

_

.
..z.
0..
.-.__
-_--..---. ..:
.:
_.__.__-.____
.___.
___,...__--_.__..-._.--_... -_.....-.
__-.__
.*.
l

15

0.821

_ ._.

.._.___._._.._
._...__..._.._. ._..:
._
._.
.
.._
*

,_ .._--..
+*

. .._ .
.

.,.

+*

13
14

-1.605
-0.608
-0.588

._

.:- ___. _.____ _-. -

.-..

+*i..

9
.
_._..___.__._____
* .+ :
10.. .__.____.___. -..__.____
-._.____._.
..__._____ .*+
11
.

0.872

1.019
-0.302
3.075
-50353
3.291

.
__-_...__y..

. .,..,..
...; _-.-_---

.. *

. ----__._.
-:*
+
1
2.
..__..
*+.
3
.
* '-.
.' ..
_.
_, .4 .-em ,~_
_.__ ."
.!-.e.
,-___~.. ____ __
..___..___
_.
* +
5.'
_..
..-__.
--6.^
CL--.. __.----_.
._-_.--._.. 2 ---.- - .---...
7.
*

-0.172
0.504

2.i67

=
=

197

-.

_ .-...
.._.......
.

__._.___ TIHE __._____________.__.-__ .ftANGE _.._
??5.W.X!

.-. ..-._. PERCEbiT

.____ ERROR

_. -_.

__.

.

.

Actual8 - * Predicted - +
.
__
_._ ._

.:

I.

PRED.

-.

_ _

,,

."

TEE MONEY SiJPPLY Ml

.-

:,

.

l

-_
.

+--

. .*
- _..
.

.‘.

* .___...+ _
*
*

24. .,

+*
.. .

149.722122

24
2.497684

.._.- -. . .

.-..... .._____,____________I___I__
-?
_. _-- ............

...
. .

~....--...-.
-.-.-.--;
---- --- .-.
.-

____
_..__. m.:..._._.....m
_._..
__-__--~ ~_-__-_.__.
___~.__
.--.---_-___.......

_. ----....

_ ..... _.

-.-.

...-.. _,..^_..
____

.-.

_-,.----

.-.---..

..--_

..._ ._.-.. ._. .

- ..-._-.._ .

_..- ..--._.. .. - ..- .- - .-..----

.._ .

.._
-

_.__ .- .._ -. ......... ..__ __._.....__ ~.. .._.._..____.....
_
.._
..

..........

.-.

..___.-,--,_-.

.

_-_I

._ .._

._. .-

.. -........ ....

- .-

-..-__ ._.. _..- .._..^. _..-__ --.---..---.-.-.-

.__

-.....
-

.-

_._
__

.

.._ --.

_._ -

_

.,.._ _....
_.

._ ___..__...-

._.._.

.-.. - . .-..

.. .
-

:

THE MONEY SUPPLY

-.

PRED.

504.249
484.d83
488.835
49i.543
49.7.194
495.590
503.871
508.800
511.737
519.750

--..

ACTUAL

477.300
482.900
487.630
493. bC0
494.100
498.400
503.700
507.890
511.900
515.600
520.103
525.530
529.bOO
532.300
534.bOO
538.300

ERROR.

M2

Actuals
* Pridicted - +
.- _.. ._.. ._. . -.._.-. .._ -_-..
-... ..-._--...__.....
_
.
c.
. .
.
- _ _.

.

_

IV-9

PERCENT. .._. .-TIME.__ _..___._.
._
__.______ RANGE

__ 477.390.

-10.

_., .._ ._..._.... _......
.-

_. 570.700

_

___. ._

.._..___

.

520.896

_...

522.787
526.959
532.799
535.a65

532.413
539.737
545.410
551.a21
552.900
5s4.349
561.206
557.616

.

570.090

543.600

549.400
552.030
554.900
555.600
561.600
566.700
570.750

26.94.9’

1.963
1.235
3.940
3.094
-2.810
0.171

5.646
0.411
0.253
0.803
0.626
-0.564

-0.163
3.153'
0.776
-2.713
-2.641
0.499
1.2b5
-5.837
-3.854
-3.990
-0.179
-2.000
-2.251
-0.395
-9.084
-O.biO

__.._._____ -

.
*+
:. -. .'
*

_.

l
.
.

*i
.___

.__ - _.._ -._

.

++ . .._.. .~

__

-..^_._ _ _._-.
_..

._.

.-_ .
.

.

7.

0. 197

__ _-. :.

.

8

.* ._____.

_... -. ._.. - .._ - ..____.._._ *t

._.._. ._... ..- _....

._. .__ __.. 1D

0.610

.._ _ _
_

.: ..__

.

_..

__..

. .._.._...

P

+

I)

*+
.
T..-..
____.__... _-_:.._....
__.
__._...._______..
..+*
++
.
'*
l .__. _..__
-._
.^ . _.. .
- .._
--_..- -_....
-.._- .._...-_.
.-..*+
.
_.
._. ._.._.__._._ ,._._. _
+
..
.
*
. .__._.
_..
.
0.
_-_
.
*
.-

22

l

23
24

20

_

,.__.

_._
..____

__.

.
l
.

-

..__-.

.._

.
.

__

*.
+

..__

.:

l.

*
*
+.

.
*
.
.
.
-

-.
+
t*
+*

.-.
*

._... __...
_,___
.-.-.. ”

..

_

it'

+

*;
._

.

_.

.

.

.

.

l

.
c

11
..__
m.12
13
14
._.--.-.
15
..____ 16
17
.._...
.:
18
19

. ._

l

21

0.153
-0.516
-0.499
0.094
0.237
-1.094
-0.711
-0.726'
-0.033
-0.360
-0.404
-0.070
-1.603
-0.107

^ ._
_

*

9

-0.032

= 950.130859
=
24
=
6.291962

- _

"

.

I_._

S&l
OF THE SWARES
NUHBER
OF OBSERVATIONS
RODT
MEAN SQUARE
DEVIATION

.

+.
_

l..: *.. ..__
.,. +
..__.-__.
.-.

6 .--

0.034

i.OOu

.*

1
_..-_.. 2
3
_,,___. 4
5

..-

.

_

-. .-. .

-.

_.
_

.-._.-_ .__. _.... --L.- -..._. ...._. -._ - ..__., .._
__...
.___... -.__.__ _.
..-.
-.
.._..-.-..

. - . .

._._...____.

_.

_

._

. _. ._ -.. __ _
_

_.

_. _-.,-,...___

;‘,.-...‘-..-“--..

__ _ __ _
__.

_ __

_.

.-..

.-

_

-. -.-._..-_..

.

_____ _

. .

._______ _ _ ._ .- _._... . _ ..-.-.

---

..-

.

_.

-”
.

_._.

‘.

;

.._.

-.

..-.__

.-.--.

_

_....^

-

. _--.-__ __-._.._ -.._-..- __...._-_.
.

.

.---

-

-.

,...._..

-

.-----

._

.r

..-.

..I

.I

-.

----

.._

-...

-.-

.^

_

.

.

,_._

._

_

.._...

.^..

..-.

.

.-_._..

.-..

-.

_._ _..__._ _
.._ _______
____
..--..

. ..-.---..-

.._ _.__.__ ..___
..___._ _____
___
..

_._

--

___.__

_

..

_.__

-.

PRIVATE

_

. __

PRED.

-. _ .

. ._...
-.--.
_.
_..

.

+JAL

ERROR
-_

140.510 .-. -' 141.200
':
136.100
137.351
137.569
143.730
140.8\=0
145.363
136.700
137.506
137.752
138.700,
i40.266
140.400
139.400
140.622
141.744
141.400
144:3(39
142.ijOO
143.366
14j.Oi)O
149.793
151.500
151.679
lSi.700
144.600
147.592
144.000
145.897
145.337
146.i100
143.750
144.827
147.270
147.000
15O.i.34
148.200
147.i.26.
145.700
146.503
146.600
150.762
147.600
lCS.500
145.718
155.083
154.900

:

.
-0.690

..___.

1.251
-6.131

.,

o-876

.

._

.

-__

9

_

.
..-i.34*'lWTO-- 159.083 -_:

+.

__._. .

..-

..p: ..-_.__..... -_ -_-_..--.
*
*
+

.._.-

-.
. . .

..

.

._I._

-.. _ _.___.-.-...s:.

_

.,

.._~

~

-

F......

2.004
-2.530
.2.701.

. ..-.

+

. .

_.

. ..-

.

_.-...

- * ..

.
.._

.-..... -.... ..__ ..-..- -_ _.._.,-.. ---__.-.- .__.”

_

-..

..- -- ..

-.

I

.._..._.

.-.--- --.-_._
--..- .._-.-.-_.. .-....._
-.-.-..

_._.

-..-.

_--

___-,

._-----.-

.--

- _..-. - ...--_.._ -_._.-._ .

.
.

_ .

. : .-. -..--

....._.I-.

.

.._ _

.

+*

.

._...

._ __. _...._..

._.-...-.-- __. .-_

-

--

-,.

.

.

-.-..

.

..-

.

.

.

-

-...

.-

.

-.__...

_ ___-

.

.

-.

.-.--..

.-..

-._-

.

*

.

.

.

..-__....._.

--_

.._

._._____,_.

.

..-.

._

.--..

-

--

--

. ._- .
_

.,_

. -.

_.

._

_

..-.._...-..
----

.

.- -

__ ______ __ - _
__

._ __ .._ _..._. .__.___.._ .__.__
.._.
_
._

---

..-

_

. .._.

,_ _

_.-- .___-.._......._.-... -...-..-.. _..--..

. -. -.-.,--._ ..-__..-. ..-.- ..-..-. .._.. ...._ ..-.__.._._.... _._. _ . _ .., ._. _....
..
-

.

__

.,..I_,..,._._ -_._ . -.
_.

...-_..._.._._,...,.____..__,... .-.. _

______._...._
- ________._.____.___ .__..
_
____... _ -... _ . . .

--.._---.

.

*

- ___________.. -.._ .._.- ._
__._

__~_____.

. .

.

0..

*

-_..__ -___-.-..

..*

.

+.

.

_ .._

.~
.

.
_

.

l
.

_

.

_

.

_..._......__ _...

__.. __...._.. ._____ ___.__ ______ ,.. __.____.____
_..,.._.

_

.
.
.
.

.._.~.__._
__

COHPUTATION

-

.-a
.
.
.

_ .._
_._

.._

.

_.-._

_

r(r
.._ .

___... .-. ;: ..,: __,_,._.__.___..._ .___,__
.._
- . -__
- _F____._
__._._..
+
2J
.'
.._. ..__”
24 ..*

= 132.730b67
24

.
.

*

-0.066

2.351689

-..

..__

._

-....._
_..--.~__

.

.

+
. *
+ .i .'
-0.782
11
.
*
- _
.
_ .-.
.,
-1. 124 __ ..__.:g,..-.=
_
._...._.__.-...__ - .. ---__. .--._ _..--. *
* 0
.
-0.014
2.G69
._l--...
14-..
*
+
15
.
1.317
--0.9971 .._____I6 .
..A...me-.--m..L...-.
e:..
.w.w+-....v....?.....
t ..-.-...L.. _
* +
0.784
17
_..__
16.: __..___._
..._ .
._ ._. ., '*+.-.
0.184
*'+
*: 19
1.305
.
0.97Y-. ._..._._. . -:
20
_...... _._.
^__._ -.._- .- .-_
-..-_-. -.* + -

=

.._,

*

l

l

,::

+

.

10

_

*+

.
.-

._....... ._ 8

’ i.113

1.127
0.270
1.934
1.426
-0.097
2.962
-3.782
4.183

-.
-

f

.

_____._.._..._. +.

0.243

463

=

-1 ,_ ._. ___. RkW
1.

.

5

5’.
683
-0.095

_,

Actuals - * Predicted - +
..,
_
:._ _

__.___.___
--2....4..?... .. . .. ._....__ ..___..-.... :. .-..- _--.-._-.......
*
+
3.
. ..__._._..._. 4 .._.. c...--..
__. __._^
*.-..A
._....
._ -+.. .._-. -.
. .._

. . .- .-...
OF

___._..

0.590

.
END

“.. ..-

.l

3.241

-0.948
-0.134
1.222
0.344
1.539
-1.134
-1.702
-0.021
2.992
1.897

SW
5F THE SQUARES
NuMSER
Of OBSERVATIONS
ROOT FlEAN
SQUARE
OkVIATION

-

.

o-919
-4.267

._

4.563
0.806

-I.

_. _
_

-0.489

.

.._

NOHBANK DEMAND DEPOSITS AT MEMBER BANKS

_ _._._..
.TI.t!E: ____
--wi

PERCENT

_..(

IV - 10

. .

.-..-

_._._. ..-._
_

._._ . .__. .
_...-..

.I.

-.

.
-

.

,

:,:,,v,

,,I

.,., .,;.,

.

IV - 11
__
.
SAVINGS DETOSITS AT W!ER

TIME MD
.._.

_
BANKS

,..,

_. __
. .

Actuals'- *
. ..I _ . .
_.-... .

:.;,.:...:,

Predicted - +
_ _.
_. ._._
I

_...

-. .-

.__._..,..
-....
._-

_-_--I

_,.,_ .._..-.

. _.

.

.) .
PREO.

_ ACT,UAL

214.369
ZLY.363
222.668
220.334
224.445
224.lS8
229.195
232.494
233.828

~--’

213.400
ZiS.,QOi)
216.200
219.800
223.100
225.2OG
227.100
231.300

233.436
238.661

_ ERRGR.

236.200
237.600
240.7iio
243.800
248.500
256.200
260.500
264.5OG

243.827

247.046
253.716
25S.bOt3

263.349
266.381
267.503

0.454

1*002

6.460

2.992

0.534
1 345

0. 243

.0.947

+

.__

_

8

l

9

*+

.

..-.-.--.l.O

_
___. ._.._
.

..-... - ..-_-- -.
_

.
.

_. ..-

..
__._

l

_

_

“2...-_

-------

___-_.

*+

-..- .-_

-. ._..-- - --.--

--_ .--

:

.
.

.._ __-._......._.-l.
.
.
_
._,.
._.
.
-I.-_.-__
.
..?
P

,.
.__._

15

.

- _-.

*
l

.

-

+‘*

-

.

l
.
-.-

,.

.

.

+ **

*

-0.707

+ *.

: --- __...._._...- __.......,.
._
- .._.._....
.
. __...

+*

-0.441

---

.-..-.---. ---. - .._._

. .._
-.-_-.

.

__._

..~.
_

126.305771

1

2.294066

24

.-._ .

_.

.._.

._._.._ ~ ___-__
.___
___.____.___...-. _..___-_-._-_ _ ___
._
_--_
__ _

.._-

. .. ..---.
..-

- . .._----

-

.

.-.

__.

- _._-_. _-._.--_...__-

...___ _-_.._____.. -_
_
_..

_.

_.

l
._..
._-..
..-..-...

.
-..--:.-. .

:a _ : _._._.._...-... __-.__..__ _.._.._... .*
.
__..
9 .
..t.

-0.656

-

.

.

.

12

___.___ _.-_ ._ -

*

. . ------..11

. .-..

.__.-..- _._.__ _- _..._ __--...-.-.
._

.

-- .------.-.-

__.
_.
-1, 878 ___ .._ 16 .-,.._.~._~~-.._. .___.________.-__~______ ~ ?..m...
-_._
_____
._
*
.
+*
-0.435
17
.
---_0.181 _,. ......A
. 18, ..--~__________-____
_-.-_-_- . .- .I..-. .
- -.-.-- 't. .._
+*
-0.371
19
.
.*
*
-1.441
20
f ~.__.
.~.
._._~ .^._. .-.. -.

=

SUM OF THE SQUARES
NUM8ER
OF OBSERVATIONS
ROUT MEAN SQUARE
DEVIATION

____.. -_ .._ .- .-

.__._:
_.____.._.______
-_.-_._-

-3.969

-1.972
-1.ii9
-1.&W..

278.500

*

_._4 _.. ___
l
-.m==_.... ..-_-__
.._
___. ,____.______,_._. - _._._
.
*+
5.
6 ..:
._I..
___-_._,
_ ..t" _.,_. _, __,__...____
_.__.
* +
7.

.,

--.

.

0.011
-0.585

-1.151
0.431
-0.997
-3.986
-L.J30

276,600

C.446
-3.638

_-

. ._

3.

0.012

.-

._

.*+

_ -...
.--. 2 .^_..._._..
l
i_t-

0.516

_.__2??.000.

.-_
1

_

RANGE~-.?13t4WX!
.-.

___.._ __-___.-_.-_.-I_.

.._ . _.__. .,
..

-0.44')
0.923

2.095
1.194
o.i)2c
2.236
1.061
-1.488
0.027
-1.459
-2.4114
-4.892

278.800

_ ..___.__.. TI.HE

0.603

-i:ol2

265.900
268.‘500
276.600
279.000

272.6L5
277.170
276.328
275.381
277.015

0.969

2.iL3

233.890

239.212

.,

PERCENT

-

,._ .__.
_

.

. .

___

._-...-_..-

_-_-

-~.__

._

L_._.,,. _
.

---..-...-- ..-- -.-.. -.

.-. _

.

.-... .
_

_._._._~__ ___..,,____.. -.- _

____ - __.._, -._____._ I_

._

_ __ _.
._L-_-_--_

.. .,.. ___

__..__.___
-_.-.._

_ _

.

_,
_
. ..-.. ~ __. ^-_ ._.__. ,.

.-----._

..- _

--...--.

--

-----

..--.

-.

- --_._- .._. ._...

.__
.

.- _
_ _ __

-.. .

..__._.-.._

._.. _,_ __
._

-__._.-.
__.__^ ._____
__-_ _._______
.

.-..

- -_-.-

._

.. . _.--.--..---

----.---

._ ._
.-.-

-_-.~

.

. -

. .._ -. .
____.__.__

_- .__,

--- -_ .,-- ._-.
-

..

._

. ..-._ -.-.

.__..

__

_ ._

..--_.-- ....-. -_-_.__,_. ._
_
.

__._
__

_

APPENDIX

Glossary of Terms and Sources of Data

-

.

Variables*
l5ndogenous
C

Currency in circulation outside of banks, SA. Table 2,
Federal Reserve Statistical Release, Division of Research
and Statistics, January 1974.**

CDCB

Outstanding Certificates of Deposit issued by commercial
banks, SA. Table 2, ReleGe.

CLBSA
CB

Total Commercial and Industrial Loans at all commercial
1973 Federal Reserve Bulletin, pp.
banks, NSA. Novezr
A96-A98, updated from current Bulletin, p. Al.7.

CLSA
CB

Total Commercial and Industrial Loans at all commercial
banks, SA. November 1973 Bulletin, pp. A96-A98, updated
from current Bulletin, p. Al.7.

DCB

Total Commercial Bank Deposits, SA.
to the identity:

Calculated according

M2 - C + DEB + CDCB.

%B

Total Member Bank Deposits subject to reserve requirements,
NSA. Series m76,
S. F. Financial Database, updated from
Table 7, Release.

DDEB

Private Commercial Bank Demand Deposits, SA.

DD:B

Total Commercial Bank Demand Deposits, SA.
to the identity:
DDEB

m

DDEB

+

Table 2, Release.

Calculated according

DDEB.

DD&

Private Member Bank Demand Deposits subject to reserve requirements gross of net Interbank deposits, NSA. Series MF3478,
S. F. Financial Database, updated from Table 7, Release.

DDPNB
MB

Private Member Bank Demand Deposits subject to reserve requirements excluslvexnet
Interbank deposits, NSA. Calculated
according to the Identity:

*SA denotes seasonally adjusted data;
data.

NSA,

seasonally unadjusted

**This release will be referred to as Release In subsequent citations.

T
DDMB

Total Member Bank Demand Deposits subject to reserve requirements
gross of net Krbank,
NSA. Calculated according to the identity:
DD&

ER

=

D&

+

Calculated according to the

Member Bank Excess Reserves, NSA.
identity:
ER

=

RT

-

D&.

RR.

FR

Member Bank Free Reserves, NSA. Calculated according to the
identity:
FR = RU - RR.

FL

Narrowly defined Money Stock (currency plus demand deposits), SA.
Table 1, Release.

M2

Broadly defined Money Stock (Ml plus time deposits other than
large CD's), SA. Table 1, Release.

RB

Member Bank Borrowed Reserves, NSA.
the identity:
RB = RT - RU.

RCD

Yield
---- on three month CD's. Part IV, Table 1, An Analytical
Record - Yields -- Yield Spreads, Salomon Brzhers.
of
and

RCL

Rate on Commercial Loans. Interpolated by the method described
-by Friedman [6] from quarterly RCL data, using the prime rate
es a related series. Quarterly RCL data are from the SSRCMIT-PENN Econometric Model database. The prime rate is taken
from the Bulletin, p. A28.

RCP

Rate on 4- to d-months prime commercial paper (averages of the
most representative daily offering rate quoted by dealers).
Series MF1400, S. F. Financial Database, updated from Bulletin,
p. A29.

Calculated according to

Federal Funds Rate. Series MF1403, S. F. Financial Database,
updated from Bulletin, p. A29.
RR

Member Bank Required Reserves, NSA.

RT

Total Member Bank Reserves, NSA.

RTB

Market Yield on 3-month Treasury Bills. Series MF1405, S. F.
Financial Database, updated from Bulletin, p. A29.

TDXCD
CB

TTDCB

Table 7, Release.

Table 7, Release.

Commercial P-P Time and Savings Deposits exclusive of CD's,
Bank
SA. Table 2, Release.
Commercial --- Time and Savings Deposits gross of CD's, SA.
Bank
Calculated according to the identity:
TTDCB

=

TD;zD

+

CDCB.

T%B

Member -Pm Time and Savinps Deposits, NSA. Series MF3477,
Bank
S. F. Financial Database, updated from Table 7, Release.

QTBB

Quantity of Treasury Bills held by Commercial Banks, NSA.
Bulletin, p. A39.

QTBP

Quantity of Treasury Bills held by Private Investors, NSA.
Bulletin, p. A39.

Exogenous Variables

U.
at
-- S. Government Demand Deposits - Commercial Banks, NSA.
Table 3, Release.
DDG
MB

U.
-- S. Government Demand Deposits at Member Banks, NSA. Series
MF3479, S. F. Financial Database,updated from Table 7, Release.

D*

Net Interbank Demand Deposits, NSA.

AH

Change in business inventories, SA. Calculated from monthly,
end of period data, Economic Indicators.

KD

Reserve Requirement Ratio on Demand Deposits. Calculated according
to the identity:
KD - (RR - KT*TD)/DD.

KT

Reserve Requirement Ratio on Time and Savings Deposits. Interpolated from quarterly figures in the SSRC-MIT-PENN Econometric
Model database.

PI

Total Personal Income, SA. Series MNlOl, S. F. National Accounts
Database. Updated from Bulletin, p. A69.

RCB

Yield on Aaa Corporate Bonds. Series MF1425, S. F. Financial
Database. Updated from Bulletin, p. A30.

RDIS

Discount Rate, weighted average computed from the New York City
rate. Bulletin, p. A8.

RTD

Rate
--PV on Time and Savings Deposits. Linearly interpolated from
quarterly figures in the SSRC-MIT-PENN Econometric Model database.

RU

Non-Borrowed Reserves. Table 7, Release.

Sl'Sl2

Seasonal. O-l dummy variables.

T

Time, January 1962 - 1.

QT

CD runoff dummy variable. QT = 0 when RCD < BCD. During CD
runoff periods, QT is a time variable that is initialized at
1 at the start of each runoff period.

Table 7, Release.

QTBT

Quantity of Treasury Bills held by commercial banks and
private investors. Constructed according to the identirty:
QTBT

BCD

=

QTBP

+

QTBB.

CD
- ceiling (Reg. Q), Bulletin, p. AlO.

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I

-2-

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