The monetary impulse measure as an explanation for Fed policy

In response to the perceived instability of the relations between traditional monetary aggregates and nominal aggregate demand a number of nonstandard indicator variables have been developed to enable monetary policy to respond to, and counteract, incipient inflationary pressures before much inflation has developed. While the Federal Reserve Board is believed to pay increasing attention to such indicator variables, it is unclear which ones are perceived as particularly important. In this note, we present a variation of the monetary impulse measure (MIM), which was recently developed by McCallum and Hargraves (Staff studies for the World Economic Outlook, 1995). Modifying the original specification of the measure, we show that the new MIM's performance in explaining actual Fed decisions is clearly superior to other indicator variables, which are widely believed to guide US monetary policy.