Masters Theses

Julia Reigel

Date of Award

12-1987

Degree Type

Thesis

Degree Name

Master of Arts

Major

Economics

Major Professor

Jean Gauger

Committee Members

Richard D. Sanders

Abstract

The transition of the monetary aggregate M1 to include other checkable deposits began in 1978 and ended in 1982. The economic impacts of the monetary aggregate transition are investigated by testing the Macro Rational Expectations (MRE) hypothesis. A two-stage method using a generated regressor correction estimates three different specifications. The first assumes that the market does not have access to relevant monetary data but that money supply decisions are made with full information. The second specification implies that expectations are formed and money supply decisions are made with full information. The third specification presents a worst case scenario where expectations are formed and money supply decisions made without the benefit of any new information. Only the old M1 is used. The time frame of estimation is 1955.1 to 1985.4. Money forecasting data include both old and new M1, the 90-day Treasury Bill rate, the rate of unemployment, and real Federal spending. The output equation uses real Gross National Product (GNP).

The results showed that specification 1 presented the most realistic picture of actual events, showing that the market did not rely on unpublished information to form its expectations. The anticipated portion of money growth was statistically significant in each specification, in contrast to previous tests of the MRE hypothesis. The analysis concludes that monetary policy can act effectively on anticipated and unanticipated portions of money growth to result in real economic impacts.

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