Economic Report of the President

well after the fact whether the money-demand relationship haschanged permanently. If one could observe money, interest rates,and nominal GNP contemporaneously, one could judge whetherthese developments were roughly in line with historical patterns. Ifthey appeared to be out of line, a shift in demand might be suspected.Two problems in ascertaining a shift are the long delay beforedata on GNP are available, and the frequent revisions subsequentlyundergone by both GNP and money data. Another problem is thatthe "normal" demand for money cannot be estimated precisely, sothat even with timely data it may take several quarters before theshift becomes evident.Suppose that a money-demand shift is suspected of having occurred,but its magnitude is uncertain. How should the monetary authoritiesadjust the targets in a way that maintains a steady degree ofmonetary restraint? First, the targets for the narrow aggregates mightbe adjusted by shifting the midpoints of the longer-run target rangesaccording to the "best guess" of how the structural shift will affectthe growth rate. Second, if the impact of the structural change is uncertain,the upper and lower bounds of the growth range may haveto be widened to reflect that uncertainty. Third, if—as in the past—the broader money measures do not appear to be affected as muchby the structural changes, more emphasis could then be put on thebroader aggregates in guiding monetary actions. At such times therelatively greater stability of the relationship of the broader aggregatesto income and interest rates may give the monetary authoritiesa somewhat better measure of monetary stringency. The risk inmaking these adjustments is that the public may lose sight of whysuch changes are being made—interpreting them as mere tinkeringor as devices aimed at loosening monetary restraint. Thus, the monetaryauthorities stand to lose credibility unless they can convince thepublic of the need for such adjustments when they are appropriate.Problems of Short-Run VariabilityOnce the annual numerical targets have been set, and adjusted formajor supply shocks or shifts in money demand if necessary, the nextquestion is how rigidly the targets should be followed during theyear. It is important to recognize that random and temporary fluctuationswill inevitably occur, affecting both the demand and supplysides of the financial markets. Empirical evidence suggests, however,that deviations from a desired money growth path lasting as long as aquarter do not destabilize aggregate demand if they are subsequentlycorrected. Hence, rigid adherence to a longer-run target over periodsas short as a month or a quarter would require wide fluctuations ininterest rates, which could disrupt the economy unnecessarily. Inview of the importance of preserving Federal Reserve credibility, it is55