Can the Monetary Models Be Fixed?
For years M 1 has been regarded as the single most reliable tool for the formation and execution of monetary policy. Serving as both compass and rudder, it forecast future rates of economic growth and inflation, while providing the Federal Reserve with a powerful mechanism to affect those rates. Simple single equation money/income models provided forecasts of comparable accuracy to the forecasts of multiple-equation commercial models. But after 1980, the M 1 models suddenly lost their forecasting ability and they have not recovered it since. Many suggestions have been made to improve the performance of the M 1 models in the 1980s. Most have recommended changes in the measures of money or income used in the models.