Econometrica: Jul, 1986, Volume 54, Issue 4
The Transmission of Data Noise into Policy Noise in U.S. Monetary Control
Agustin Maravall, David A. Pierce
Seasonally adjusted monetary aggregate data as published by the Federal Reserve,are subject to large revisions, which can be interpreted as error in the preliminary measures. Since short-run monetary policy is set for seasonally adjusted data when only preliminary estimates for recent months are available, an interesting question is: Would policy have been much different if final data had been available? For the period of the seventies, we estimate what would have been the monthly Federal Open Market Committee targets for M1 and the federal funds rate if the preliminary estimate of the rate of growth of seasonally adjusted M1 had been equal to the final one. We find that, despite their large size, revision errors seem to have little impact on the setting of targets. The results suggest that the Fed reacts to a signal in the rate of growth of M1 which is smoother than the seasonally adjusted series and less affected by revisions. Since the error associated with the revision is orthogonal to the preliminary measurement, while the noise extracted is orthogonal to the "true" variable (the signal), the analysis illustrates the different effects of the two alternative error-in-variable specifications.