ABSTRACT
In the 1980s, the monetary aggregates became less reliable indicators because their growth rates displayed increased volatility, reduced correspondence to business cycles, and less clearly defined cyclical turning points. The cyclical conformity improves when money is deflated by the consumer price index, though the volatility and clarity of turning points still deteriorate in the 1980s. The change in the behavior of Money supply appears to characterize the broader monetary aggregates as well. The Monetary Control Act of 1980 removed all ceilings on rates in stages by 1986 except for demand deposits. These developments have resulted in massive shifts in the form in which the public holds its transaction balances and savings. Significantly, the Federal Reserve has reduced the attention it pays to monetary aggregates in its conduct of monetary policy. While the base represents the outcome of monetary policy actions, it comprises mostly currency, which is supplied on demand and reflects aggregate activity with a lag and not a lead.
