Short-Run Money Growth Fluctuations and Real Economic Activity: Some Implications for Monetary Targeting DALLAS S. BATTEN AND 14. W. HAFER HERE is ample evidence that the rate of infla- tion is directly related to the long—tenn growth of the money supply. indeed, this relationship has been demonstrated for various countnes. m The implica- tion of this finding is that the control of money growth over the long term is vita) to the control of inflation, a realization that undoubtedly helps to explain the fairly recent announceniermts of mnonetary growth targets in most of the major industrial countries 2 Although the money growth/inflation connection is fairly well—documented, the relationship between short—nm movements in money growth and eco— nom ic activity is less well—known. Even though this connection has been demonstrated for the United States, its general applicability has not beems tested.~ The purpose of this article, therefore, is to in- vestigate the relation ship between short—run movements in the growth of the mnoney stock and Dallas S. Battemm , -- NI55,5ev Gri isvtls Stalmi I itv coi c I Ims (I sstio ml: Amm Im mtc rm i ation sml Comsm pan son,’ this Rc’c it’ om (()ctoIse r 198 I ). pp. 7’ 12. See sti so Bicharcl T. Scl cI en, hi fiat ion sos ci Ni on c-tarv c;rosvtis F spe nit-mice in Fon i’tc c-ms Coo ii tn c-s of En rope am, cl Noills Ansen ca Simsc’e 1958,’’ F’eclc-ral Resene ilamsk cml RichiuomscI Ec’mmimoioic Her ice: (Ncsveoslsem’/Decenslse r 1981). Isp. 19—35. tm Of the Group csf Ten countries pins Ssvitzerlamsd, cmiv Iwo. Belgimiom and Swc’clems, cm ncmt fcmrnsallv aisisonmscc’ inonc-tan gmo cv tis targets cmf some kim mcI. S c-c Om’gamsi zatiomi fcmr FcomicsnsIc C cs—i pe rsstics miami ci Deve lopmssemit, lions’ to cit 1cm i’gc’I.s- onc/li f/a Si ciii Con fcc,! (Paris:OECD, 1979). ~ti ml ton Fri edlmssan and Amsmsa J Sc’im svartz - ‘Nb is cmv sims ci Bns,n c-s Cycles,’’ Rc’cicic of’ Lc’cniooimca ‘mc! Stntislk’s (Feisnnary 1963), PP. 32 — 7 3: Williamss Poolc’. “‘I’lsc Reiationslsip of Nloisetarv 1) cccl erati oms s tcm Bus inc- ss Cyci c- Pc:’ ak s : Ams cmtisc’ r fbi k sit tis e Eviclcmisc’c-’,’’ Journal o/’ hincinc’c )j,mmse 1975m, pp. 697—712: ssocl Lecmnall C, Amiclersc’is assci Keith NI. Carison_’’A Nlcsnetarist Nlcsdei for Ec:csnomssic Stsslsilizssticmms,’’ tisis Rc’cic’mc (April 1970), pp. 7—25. fluctuations in real economic activity. 4 Althocmgh the evidence preseisted in tlsis article is not de- rived from a rigoromms empirical absalysis, it imsdicates quite c-omsvincimsglv that virtually every clownturms its ecomsoissic activity us recent years its each of the countries examnined was preceded by a significamst reductioms its tlse grow’tls of its msarrowlv defined mnoimev scmpplv. H P 1 (HM).lI( H I P H ‘Il-IF Tl.IFORY There is little disagreemnent that s ignificamst clsanges us the growth of the nsomsev suppl~’ inflmmetsc-e economic activity. Chamsges in the long—/cnn grcswth of money, measured by soisse moving average csf momsev growth over a nunsber of years, affect the rate of inflatiots. lmscleed, several empirical studies of tlse timsited States indicate tlsat it mmsav take as loisg as five years for the rate csf imsflatioms to reflect completely the imsspact of a chamsge its msscsnev growth.~More recent ~iis c’ cmvi ci c’isc’c’ is resc- isteci silscm sued s I igl it omi the dci mate- schom it tis e im m ipac t cml NI I grcswtls ci cm rim g ise nod s of Iii Isinc’ i aI simm i csvatiom m sims c imsstitnticmmsal chamtgc. By c’mcammiiisiisg the ccmnnec’tioms hc’tweemi us ort— rm in fin ctm inti o mis in NIl grcmwtl snsci restl ccc) m lom “ic’ ac’ti viIv sic m’cms s cci nms tries sv i tim cliff crc’ mst Ii mis,, ic istI i mis ti tcmti om is am, dl nego— I ati (miss, 5cmmmsc’ cm IscI crstssms cl ims 5) cs I the mc’ laticmms ship ~5 rcsi scm stm Ic- ss i ml 51 chamigimmg fimisomc’isd c-msvircsmmmne-mit slav fir’ gslimccl. For a good e mcaisspi e of the once mIss intv tls at m”rvacl c’s cii rrc’ms t th (skims5) on tlsc’ 1 n tore Ificssc’ y of targc’ti is g csss NI 1, scm e ,‘\ms thesisv NI. Solon lcsms. Fmis an ci smi 1mm ml cmvati omis am ‘ci N hisms c’tarv Po lie~,’’Fc’clc-ral Resem’ve Bammk of New York. Animal /lc’jiom’t, 19’S) (1982), pp. 3—17; ssmsdi Edward Yarclemn, F. F. I-Inttcsim Ec’oncmnnc’.s- A/crc (jammnscrv 29, 1982’. tm Sc’c Dcnis 5, Karmsisskv, ‘‘‘l’isc’ Limik Betweemi Nlomic’v amal Prices 1971—76,’’ this lic’m’ic,c jnm ie 1976), pp. 17—23; Kcitls NI. Carlsomi, ‘‘Time lag Fosmis Nlomiev to Prices,’ timis Rc’cic’ic fOc’tcslsc’r 1980), isis’ 3—10; ansi j oh is A. Taos is, ‘‘Ems e m’g\’ Fric’e s simm ci Slsmm rt— Rnis Ec’cm 11cmIs, ic’ Pc’ rf ormm lstlscc’,’’ tls is /1cc’ Ic’ mc’ (iso in ars’ 1981). isis. 3—17. 15