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Trends and Cycles in the : 1959-78 By David B. Foster

The behavior of the nation's the article also discusses an alternative set of has received an increasing amount of attention aggregates that has been proposed by the staff in recent years. Most believe that of the Board to replace the monetary developments have important impli- traditional measures. The first section deals cations for the , and the Federal with trends in the major monetary aggregates, Reserve System has increasingly emphasized while the second section discusses the cyclical monetary growth in the implementation of behavior of the money supply measures. The . As a result, information on proposed aggregates are discussed in the third the behavior of the money supply is continually section. analyzed by large segments of the public to discern its implications for economic TRENDS IN THE MONEY SUPPLY developments and monetary policy trends. The secular movement, or trend, of an A number of financial innovations occurring economic time series is the -run underlying over the past several years appear to have movement of the series. The trend ignores the altered the behavior and usefulness of the shorter run cyclical, seasonal, and irregular monetary aggregates as currently defined. In variations in a series in order to focus on the response to these developments, the Federal behavior of the series over the long run. The Reserve is considering alternative definitions of steady upward trend of the money supply is the monetary aggregates that are more shown in Chart 1, which contains the actual consistent with current financial practices. levels and the estimated trend levels of MI, the This article reviews and analyzes the narrowly defined money supply.' behavior of the major money supply measures over the period 1959 through 1978. The analysis focuses on trends and cycles in the monetary aggregates and their components. In l The actual values are seasonally adjusted quarterly addition to the major money supply measures, average data. Estimated trend values are obtained by regressing the natural logarithms of the seasonally adjusted quarterly average levels of the aggregates and components on fourth order polynomials in time. The order of each polynomial is set at four to allow for changes in trend due to the four business cycles that occurred over the same David B. Foster is a research associate at the Federal period. The growth rates are calculated from the ttends Reserve of Kansas City. Assistance in the preparation estimated in this way. Specifically, each growth rate is of this article was provided by Bryon Higgins and Scott calculated as the difference in estimated natural logarithms Winningham, financial economists. of the trend level.

Economic Review June 1979 Chart 1 ACTUAL AND TREND LEVELS OF MI Billions of Dollars Billions of Dollars 380 , 1 380

The calculated growth rates of the trend per cent between 1959 and 1%8. Similar values of the three major monetary increases occurred in the trend growth rates of aggregates-Ml, M2, and M3--are contained M2 and M3. in Table 1.' As shown in the table, the growth The acceleration in the growth rates of MI, rates of all three aggregates accelerated during M2, and M3 reflects an acceleration in the the 1959-78 period. During the last half of the trend growth rates of the four major period, 1969 through 1978, the trend growth components of the monetary aggregates--cur- rate of MI was 5.9 per cent, compared with 3.3 rency, demand deposits, time and deposits at commercial other than large negotiable CD's, and time and savings deposits at nonbank thrift institutions. The trend 2 The monetary aggregates to be discussed in this article are MI, M2,and M3. M1 consists of and demand growth rates of each of the four components, deposits (checking account balances) held by the nonbank also shown in Table 1, were higher during the public. M2 is equal to M1 plus time and savings deposits of 1969-78 period than in the 1959-68 period. commercial banks other than large negotiable certificates of deposit at weekly reporting banks. M3 is equal to M2 The broader aggregates-M2 and M3-have plus deposits at nonbank thrift institutions. grown more rapidly than MI in the past 20

4 Federal Reserve Bank of Kansas City Table 1 TREND GROWTH RATES IN SELECTED VARIABLES (Averages of quarterly percentage changes)

Var~able 1 959-68 1969-78 1959-78

M 1 3.3 5.9 4.6 M2 6.0 8.7 7.4 M 3 7.2 9.7 8.4 Currency 4.1 8.2 6.2 Demand deposits 3.1 5.2 4.1 Time and savings deposits in M2 10.4 11.1 10.8 Time and savings deposits at nonbank thrift institutions 9.4 11.2 10.3 Real GNP* 4.1 2.9 3.5 GNP deflatort 2.3 6.3 4.3 rate on * 3.8 2.0 2.9 on time and savings deposits 5 6.7 1.8 4.2 *Real GNP is GNP adjusted to exclude the effect of changes in the level. t~heGNP deflator is a measure of changes in the . *the 4- to 6-month commercial paper rate is used as a measure of interest rates. - The commercial bank passbook savings rate is used as a proxy for the rate on time and savings deposits.

years. Throughout the 1959-78 period, the demand-oriented, focusing on factors that trend growth of M2 (7.4 per cent) was higher influence the public's demand for the aggre- than the trend growth of M1 (4.6 per cent). gates and their components. This occurred because time and savings A demand-oriented analysis indicates that deposits at commercial banks, which are movements during the 1959-78 period in the included in M2 but not in M1, increased more trend growth rates of the monetary aggregates rapidly than either demand deposits or and their components-currency, demand de- currency. Similarly, M3 grew more rapidly than posits, and time and savings deposits-were M2 over the past 20 years because the interest- closely related to movements in real income, in- bearing component comprises a larger flation, and interest rates. Traditional theories percentage of M3 than of M2. indicate that the demand for monetary is The patterns observed during the 1959-78 positively related to real income, the price level, period in the trend growth rates of the and their own rates of return, and negatively monetary aggregates may be analyzed by related to the expected on alternative reference to either demand or supply forces. A financial a~sets.~Rising real income is generally supply analysis would focus mainly on factors controlled by monetary policy. A demand analysis, on the other hand, would examine 3 See, for example, William J. Baumol, "The Transactions Demand for : An Inventory Theoretic Approach," factors affecting the public's demand for Quarterly Review of Economics, Vol. 66, November 1952, monetary assets. The analysis in this article is pp. 545-56.

Economic Review June 1979 accompanied by increases in monetary assets, rapid growth of the monetary aggregates have as the public attempts to keep a stable been offset to some extent by less rapid growth relationship between its monetary balances and in real income over the past decade, which has its real income. Rising tend to be tended to dampen growth in the demand for accompanied by increases in nominal monetary monetary assets. assets as the public seeks to maintain the Differences in the responsiveness of various purchasing power of its money balances. Rising monetary assets to changes in interest rates and market interest rates, on the other hand, real income help explain differences in trend generally result in declines in monetary assets, growth rates among the monetary aggregates as the public shifts out of these assets and into during the 1959-78 ~eriod.~For example, the alternative financial assets in order to maximize rapid growth of time and savings deposits and interest income. Increases in interest rates on the broader monetary aggregates relative to the time and savings deposits are associated with growth of M1 reflects in part the differential increases in some monetary assets-time and impact of interest rates on various monetary savings deposits-and with declines in other assets. The dampening impact of rising market monetary assets-currency and demand interest rates on monetary growth was offset deposits.' somewhat for M2 and M3 by the rise in rates The impact of changes in income, , on the time and savings deposit components of and interest rates on the demand for various the broader aggregates. That rise in rates, types of monetary assets helps explain the however, reinforced the negative impact of secular behavior of the monetary aggregates higher market rates on the growth of MI, since and their components. For example, empirical the desirability of holding demand deposits and analysis indicates that acceleration in the rate currency varies inversely with both market of inflation explains most of the acceleration in interest rates and rates on time and savings the growth of the aggregates and their deposits. components over the past 20 years. In other The rise in real GNP also contributed to the words, the more rapid growth in the money relatively rapid growth of the more broadly supply measures during the 1969-78 period compared with the 1959-68 period was associated with a higher inflation rate in the 5 The discussion in the remainder of this section is based in part on the results of regression analysis indicating the later period (Table 1). In addition, rising mar- following elasticities, which measure the responsiveness of ket interest rates depressed monetary growth the demand for assets with respect to their determinants. between 1969 and 1978 less than in the Cornmerclal Time and period from 1959 to 1%8, since interest rate Prmce Real Paper Savlngr increases were proportionately less in the more Elastoc~tyof the demand for Lee1 GNP Rate Depoutr recent period. The factors contributing to more Currency 100 .58 -.03 - 08 Demand deposatr 100 55 -07 - 14 T~meand savlngs deposlts In M2 1 00 1 75 -.21 21 T~meand savlngs deposlts at nonbank thr~fi ~nst~tut~ons 100 1 35 - 24 .42 The empirical methodology employed assumes unitary price 4 The rates of return on most deposit components of the of the demand for each monetary , which aggregates are subject to ceilings set by the regulatory implies that the demand for assets changes proportionately authorities. The ceiling on demand deposits has been zero with the price level. Thus, price behavior does not account since the 1930s. However, the ceilings on time and savings for differential growth rates among aggregates. Changes in deposits at commercial banks and at nonbank thrifts have the rate of inflation can, however, help explain the increased, although generally not by as much as market variation in growth rates of a particular aggregate or interest rates. component over time.

Federal Reserve Bank of Kansas City defined monetary aggregates. Empirical peaks in MI, M2, and M3 generally occur prior analysis indicates that while the demand for to the peak in business activity, and the trough currency and demand deposits increases less in the monetary aggregates tends to occur than proportionately to changes in real income, before the trough in the . An the demand for time and savings deposits exception to this pattern occurred in the increases more than proportionately to changes vicinity of the trough of the 1973-75 , in real income. Thus, the positive impact of when M1 continued to decline cyclically increases in real GNP on monetary growth over following the trough in the business cycle. This the period from 1959 to 1978 was more atypical pattern may reflect a shift in the pronounced for monetary aggregates that normal behavior of M1 in the mid-1970s.' Due include time and savings deposits than for the to this shift, M1 grew less rapidly than it narrowly defined money supply, which includes typically does following business cycle troughs. only demand deposits and currency. Although the cyclical behavior of the aggregates is similar in terms of timing, the THE CYCLICAL BEHAVIOR OF THE various money supply measures differ MONEY SUPPLY noticeably in the degree of their cyclical vari- ability. Table 2 presents the standard Cyclical movements of an economic time deviations, which are measures of the degree of series are recurring, although not necessarily variability, for the cyclical movements in the periodic, variations related to fluctuations in monetary aggregates and their components. general economic activity. To examine the These standard deviations show that cyclical cyclical behavior of a series, the trend movements in M1 are less volatile than cyclical movements in the series must be removed so movements in M2, and cyclical movements in that the shorter run variations can be M2, in turn, are less volatile than cyclical identified. For example, while the trend level of movements in M3. The differences in volatility M1 increases steiidily, M1 falls below the trend between M1 and M2 reflect the impact of time at times and rises above the trend at other and savings deposits at commercial banks, times. The cyclical component of M1 consists which are in M2 but not in MI. Cyclical of these fluctuations around the trend. The movements in these deposits are much more percentage deviations of the actual levels from volatile than those in MI. Similarly, the greater the estimated trend levels are used to represent cyclical volatility of M3 than of M2 is due in the cyclical behavior of each series. Cyclical part to the impact of time and savings deposits movements in MI, M2, and M3 are shown in at nonbank thrift institutions, whose cyclical Chart 2.6 movements are more volatile than cyclical The cyclical movements in each of the money movements in either M1 or time and savings supply measures tend to lead the general deposits at commercial banks." In addition, business cycle (Chart 2). Thus, the cyclical For a good empirical study of the apparent shift in the , see Stephen M. Goldfeld, "The Case of the Missing Money," Brookings Papers on Economic Specifically, the residuals obtained from each trend Activity, 1976:3, pp. 683-739. estimation procedure are assumed to constitute the cyclical 8 Part of the explanation for the greater volatility of time movement of each series. Any irregular variations not and savings deposits at nonbank thrift institutions than of averaged out by using seasonally adjusted quarterly average the time and savings deposit component of M2 may be that data, however, are subsumed in the cyclical portion of the the latter contains large negotiable CD's at banks other series estimated in this way. than weekly reporting banks. These large time deposits are

Economic Review June 1979 Chart 2 ESTIMATED CYCLICAL MOVEMENTS OF THE MONETARY AGGREGATES Per Cent Per Cent

NOTE: Shaded areas represent as dated by the National Bureau of Economic Research, except for the shaded area in 1966-67, which corresponds to a "mini-recession." For purposes of this article the peak of the mini-recession is dated at the fourth quarter of 1966, and the trough is dated at the second quarter of 1967. time and savings deposits, which tend to reflect GNP, interest rates, and M1 in the vicinity of the large cyclical movements occurring in mar- cyclical peaks is seen in Chart 3, which shows ket interest rates, comprise a larger percentage average cyclical movements in these variables in of M3 than of M2 and thereby contribute more the vicinity of the peaks in general business to the volatility of M3 than to that of M2. cycles during the 1959-78 period. For example, The cyclical behavior of the money supply on average, for the quarters in which cyclical measures and their components is closely re- peaks occur, the level of M1 was below its trend lated to cyclical movements in real GNP and by about 0.25 per cent. interest rates. The relationship between real As Chart 3 also shows, during the initial phases of a cyclical downturn in MI, there is a sharp cyclical increase in market interest rates. managed liabilities that are used by banks to offset Interest rates undergo a sharp rise from the movements in other deposits. Thus, the inverse relationship third quarter through the first quarter before between large CD's and other deposits at commercial banks may contribute to the lower variability of the total time and the cyclical peak. During the same period, M1 savings deposit component of M2. shows a cyclical decline, despite a generally

8 Federal Reserve Bank of Kansas City Chart 3 THE BEHAVIOR OF SELECTED VARIABLES IN THE VICINITY OF BUSINESS CYCLE PEAKS Per Cent Per Cent 4 40

3 30

2 20

1 10

0 0

-1 -1 0

-2 -20

-4 -3 -2 -1 0 1 2 3 4 Quarters Preceding and Following Peak stable real GNP. Thus, the decline in M1 beginning in the peak quarter and extending reflects the rise in interest rates.9 However, through the four quarters after the peak, both

., ,. ". , " , ,', b, ',d' ' real GNP and interest rates move generally ( Table 2 : downward. Also, M1 continues its cyclical de- - - ST%NDARD 'D EVIATIONS OF THE cline during most of this period. In this latter i.^". . .ES$I@~JTED ic~~~~~~~~q~~~ENTS ': stage, therefore, the cyclical decline in M1 -,-::'O$,.TH.E'MONE$A'RY A~~GREG~$,ES. ' reflects mainly the cyclical downturn in real .! '; '" .<: KND THEIR ~;OMPONEN~S; : .. 2 . . GNP. The decline in interest rates offsets some 4 ',,$ " &*'L,b. (,, , * L of the impact of real GNP, reducing somewhat '. , ,:5 . ,+,, ,- .,, . . . , ,,standard. ::b$giebg~e;~or ~~rnp0,"~nt';,.. $'+$;,;..' $..p~e"igt'ib"n ,,;* the extent of the decline in MI. $L &,>, >. ,$ 3- ~,..,--,,, , ?,,, . . ","_.. ,,..,'.">,. 't;.. ' " ,i, <';:A:, : -...'-:. f i",, '3, ,'5 .> . , ,,,.. ' The broader money supply measures-M2 :; ,MI -,:-: :1, 0.93' and M3-as well as the time and savings

.':+j,&i2.,,".'i-iI ,- _( . -. . )'/- .',1.35 " ,; ;>.; ),'a.$T*-, " - ' . deposit components of these measures follow ., . ,%" l, . '" ' ' ?$, ,, , '"~"0-3 ,:' . I ' , # -. , ,'.*' * b ,4%- "" s sg-,, i .. ,. - .. .j. t..', 4:3:.,.li.:, ', L:'I:.~I?,~, !; the same pattern as M1 in the vicinity of cyclical J-!::? :z>";-;s,, , :: .. i:.,, ,<: ",", .': ( ' i,:l' ' . . 7 ::. <.C;ulreficQ ' ." ,. .' ' ' ,,- -< : 0.~86' & - 9 ."' .> ,- ' .t ) " -.P. , 9 For purposes of exposition, the discussion of cyclical :,- ~imrind.deposits;, -, .. 1 .27 :: 22 T."'%r**%':,*:i;:."" 2"" . ..,", . ?, ,;.; .:j,; :">. ..,,.:,-, . ,. movements in the monetary measures attributes these *~me~and;savings.deposits,I, :f;7:.& i+,:$ :;p1~:60;,~':$.';g* JJ$$.;$,~;&@ .< :. ..A. ' "i i.; ",%. . .., "$8';"; .,," , ,r . .,. .I movements to the current effects of interest rates and real .$$posit$ .;;$? ;- 6, GNP. However, other factors, including the lagged effects <31,i!.*:Nonbankthfift yl- i,".~i...ii5%J,. :;,;[;i,!i.z $j25,;T< I .;:: .. ., .:; . IP . ., ~." " , . ,* .;. ,t-*.-&:! of income and interest rates, may also be important.

Economic Review June 1979 9 peaks. That is, M2 and M3 decline sharply in the in the third and second quarters prior to the initial phase, with the decline being less business cycle trough, both M1 and real GNP pronounced after the cyclical peak has been show cyclical declines. Interest rates are reached. Moreover, the relationship between relatively stable during this period, so that the cyclical movements in the broader aggregates decline in M1 reflects the decline in real GNP. and real GNP and interest rates is similar to the The decline in MI slows in the quarter relationship between M1 and the other variables preceding and the quarter of the cyclical trough -that is, the initial downward movement reflects in response to the sharp drop in interest rates a sharp rise in interest rates, while the downward during this period. In the quarter following the movement in the latter stages reflects the impact trough, real GNP increases and interest rates of the decline in real GNP. register further declines. Thus, the upward The relationship between real GNP, interest movement in MI during this quarter reflects rates, and M1 in the vicinity of cyclical troughs the positive influence of both variables. in the general business cycle is shown in Chart Subsequently, real GNP continues to rise and 4. The chart shows that as M1 declines during interest rates move in a mixed pattern, with the the initial stages of recessions there is an upward movement in MI primarily reflecting associated cyclical decline in real GNP. That is, the rebound in the economy.

Chart 4 THE BEHAVIOR OF SELECTED VARIABLES IN THE VICINITY OF BUSINESS CYCLE TROUGHS Per Cent Per Cent 4 40 Commercial Paper Rate (Right-Hand Scale) 3 -I 30

2 \ 20

0

-1

/- Real GNP \ / -2 I -20

Quarters Preceding and Following Trough

Federal Reserve Bank of Kansas City Table 3 THE PROPOSED MONETARY AGGREGATES Proposed Aggregate Component. .

M1 Current MI Plus: Negotiable order of withdrawal balances union share drafts Demand deposits at thrift institutions Savings accounts subject to automatic transfer Less: em and deposits of foreign commercial banks and official institutions

M2 Proposed MI Plus: Savings-,depositsat all depository institutions not otherwise included in proposed M 1

M3 Proposed M2 Plus: . All time deposits at all depository institutions

THE PROPOSED MONETARY Proposed M2 equals proposed M1 plus savings AGGREGATES deposits at all depository institutions not As a result of recent financial innovations otherwise included in proposed MI. Unlike and regulatory changes altering the character current M2, proposed M2 omits time deposits of the public's monetary assets, the staff of the at commercial banks and includes savings Federal Reserve Board has proposed revisions deposits at nonbank thrift institutions. in the existing definitions of the monetary Proposed M3 adds time deposits at all aggregates. These changes recognize the depository institutions to proposed M2. Unlike possibility that past relationships may not be a current M3, proposed M3 includes large good guide to future behavior. In constructing negotiable CD's at weekly reporting banks.1° the proposed aggregates, the emphasis is As seen in Table 4, the relative trend growth placed on combining deposits with similar rates of proposed MI, M2, and M3 followed liquidity characteristics rather than on the type the same general pattern as their current of depository institution at which they are held. counterparts during the 1959-78 period. That For example, the proposed definition of M2 is, for the period as a whole, proposed M3 grew includes all savings deposits, regardless of more rapidly than proposed M2, and proposed whether they are held at banks or at thrifts. M2 grew more rapidly than proposed MI. Also, Table 3 presents the set of revised defini- for each of the proposed aggregates, their trend tions proposed by the staff of the Board of Governors. Proposed M1 differs from current lo For a discussion of these recent financial innovations M1 in that it includes transactions-related and regulatory changes as well as an explanation of the balances at all financial institutions, while proposed monetary aggregates, see "Redefining the Monetary Aggregates," Federal Reserve Bulletin, Board of it excludes demand deposits of foreign com- Governors of the Federal Reserve System, January 1979, mercial banks and official institutions. pp. 13-42.

Economic Review June 1979 Table 4 TREND QROWH RAPES OF CURRENT AND PROPOSED MONEY MEASURES (Averages of quarterly percentage changes) 1959-68 1969-78 1959-78

Current MI 3.3 5.9 4.6 Proposed MI 3.3 5.9 4.6

Current M2 6.0 8.7 7.4 Proposed M2 5.6 6.7 6.2

Current M3 7.2 9.7 8.4 Proposed M3 7.6 9.8 8.7

Domestic demand deposits and other transactions balances 3.1 5.2 4 .l Savings deposits at all depository institutions 7.5 7.3 7.4 Time deposits at all depository institutions 23.9 16.7 20.3 growth rates accelerated during the period, M3 during the 1959-78 period, due to the rapid with growth rates in the 1969-78 period exceed- growth of large certificates of deposit, which ing those in the 1959-68 period. are included in proposed M3 but not in current Between 1959 and 1978, there was no differ- M3. The greater growth of CD's reflects the ence between the trend growth rates of current absence of ceiling rates on these large certifi- and proposed MI, but the trend growth rates of cates. proposed M2 and M3 were somewhat different The cyclical behavior of proposed MI, M2, than those of current M2 and M3 (Table 4). and M3 is generally similar to the behavior of The similarity in trend growth rates between their current counterparts. As shown in Chart proposed and current M1 reflects the fact that, 5, all the measures decline in the vicinity of during the 1959-78 period, the composition of recessions and generally lead the turning points proposed M1 differed little from that of current of the general business cycle. However, M1. Over the same period, proposed M2 grew proposed M2 exhibits significantly more less rapidly than current M2. The slower cyclical volatility than current M2 (Table 51." growth of proposed M2 reflects the slower Proposed M2 also exhibits slightly more cyclical growth of savings deposits at nonbank thrifts than of time deposits at commercial banks. Savings deposits at nonbank thrift institutions 11 Predictability as well as variability may be important in grew more slowly, in part because the ceiling assessing the usefulness of alternative monetary aggregates rates on these deposits increased during the for monetary policy purposes. No attempt was made in this study to determine the degree to which the variability of the period less than ceiling rates on time deposits. various aggregates and their components could be Proposed M3 grew more rapidly than current predicted.

Federal Reserve Bank of Kansas City Chart 5 ESTIMAT.EDCYCLICAL MOVEMENTS OF THE PROPOSED MONETARY A6GWEGABES Per Cent Per Cent

NOTE: Shaded areas represent recessions as dated by the National Bureau of Economic Research, except for the shaded area in 1966-67, which corresponds to a "mini-recession." For purposes of this article the peak of the mini-recession is dated at the fourth quarter of 1966, and the trough is dated at the second quarter of 1967. volatility than proposed M3, in contrast to the and thrifts-all of which are included in pro- relationship between current M2 and M3.I2 posed M2-to exhibit considerably more cycli- This is because the savings deposit component cal volatility than other monetary assets. of proposed M2 is more cyclically volatile than CONCLUSION the time and savings deposit component of either current M2 or proposed M3. Because the The secular and cyclical behavior of the ceiling rates on savings deposits remain current and proposed monetary aggregates and relatively stable over the course of the business their components have been examined in this cycle, the wide fluctuations occurring in market article by analyzing the factors influencing the interest rates cause savings deposits at banks demand for various monetary assets. The analysis shows that the trend growth rates of the aggregates and their components have l2 This occurs in spite of the fact that time deposits at all ast ears depository institutions are the most volatile of the various increased in the p y despite an com~onents.The reason is that the cvclical movements of u~wardtrend in market interest rates and timi deposits and of savings deposits tend to behave declining growth in real income. More rapid inversely: Whenever one increases, the other tends to decrease. Thus, their sum is less volatile than either taken for most the increased separately. growth in the demand for monetary assets, as

Economic Review June 1979 13 and businesses have attempted to and savings deposit component of the broader maintain the real purchasing power of their aggregates are relatively more responsive to money balances. The broader aggregates, cyclical fluctuations in income and interest which contain a large interest-bearing rates. For example, M2 and M3 typically component, have increased more rapidly than decline more than M1 in the vicinity of a the more narrowly defined aggregates, both recession-initially because of high market because rates on time and savings deposits have interest rates and later because of declining real moved upward with market interest rates and income. because the broader aggregates are more Over the 1959-78 period, the secular and responsive to changes in real income. cyclical behavior of proposed M1 differed little Cyclical movements in each of the current from that of current MI. Greater differences and proposed money stock measures tend to have emerged recently as a result of rapid lead the business cycle. The cyclical movements growth in ATS, NOW accounts, and share of the broader aggregates are generally more drafts. For example, in the first quarter of volatile than cyclical movements in the 1979, proposed M1 increased at an annual rate narrower measures, however, because the time of 2.0 per cent, while current M1 declined at an annual rate of 2.1 per cent. On April 20, 1979, Table 5 a Federal Appeals Court ruled that current law STANDARD DEVIATIONS OF THE does not authorize ATS, NOW accounts, and ESTIMATED CYCLICAL MOVEMENTS credit union share drafts. Therefore, the extent OF THE CURRENT AND PROPOSED to which current and proposed MI differ in the MONEY STOCK MEASURES future will depend largely on action by Standard Congress delineating the types of accounts that Aggregate or Component Deviation can be offered by banks and thrifts. Proposed M2 and M3 exhibit significantly Current MI 0.93 different behavior than current M2 and M3. Proposed M1 0.93 Due to its greater responsiveness to movements in market interest rates, proposed M2 exhibits Current M2 1.35 greater cyclical variability than current M2. Proposed M2 2.46 Therefore, proposed M2 shows greater weakness during periods of high interest rates Current M3 1.81 than current M2. Proposed M3, on the other Proposed M3 2.38 hand, reveals greater strength than its current counterpart during periods of high interest Domestic demand deposits and rates because it includes large negotiable CD's other transactions balances 1.32 at weekly reporting banks, which are not Savings deposits at all depository subject to regulatory interest rate ceilings. It is institutions 4.1 8 important to recognize these differences in Time deposits at all depository evaluating the usefulness of the proposed institutions 5.53 aggregates for monetary policy purposes.

Federal Reserve Bank of Kansas City