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FEDERAL RESERVE BANK OF KANSAS CITY FORECAST

 KANSAS CITY, Mo., Jan. 11 /PRNewswire/ -- Despite recent studies that tend to downgrade the money supply as a useful forecaster of economic activity, new investigations by economists at the Federal Reserve Bank of Kansas City support the previous consensus that money, except for a period during the early 1980s, has remained a useful (though not necessarily the best or the only) indicator of future economic activity.
 Senior economist Sean Becketti and Charles S. Morris, an assistant vice president and economist, report their findings in the current issue of Economic Review, the Kansas City Fed's quarterly research journal.
 Writing in "Does Money Still Forecast Economic Activity?" Becketti and Morris examine the claim that money lost its forecasting ability after the 1970s. They explain why the relationship between money and output may have changed in the early 1980s, and present new evidence suggesting that if money lost value as a predictor of output, that loss was temporary.
 "Financial markets witnessed significant developments in the 1980s," they write, citing deregulation of deposit rates, growth of money market and mutual funds as substitutes for bank deposits, and changes in Federal Reserve operating procedures. Regarding the last item, they point out that "from October 1979 through October 1982, the Fed placed greater emphasis on managing the growth of the monetary aggregates and allowed interest rates to vary more than before, drastically reducing the elasticity of the money supply. As a result, shifts in demand for money had a large effect on interest rates and on output."
 That change was temporary. When the Fed returned to an operating procedure that placed greater emphasis on short-term interest rates, the money supply became highly elastic again and money demand shifts had virtually no effect on output.
 Becketti and Morris applied a number of statistical tests to analyze data from various sample periods. Their research leads them to believe that "the temporary change in the Fed's operating procedure may have had a powerful effect on the money-output relationship. When the period of this change is excluded from the analysis, money's ability to forecast economic activity is undiminished."
 -0- 1/11/93
 /CONTACT: Lowell Jones, public affairs department of the Federal Reserve Bank of Kansas City, 816-881-2797/


CO: Federal Reserve Bank of Kansas City ST: Missouri IN: FIN SU: ECO

WB-TS -- NY034 -- 5649 01/11/93 11:11 EST
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Date:Jan 11, 1993
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