Dallas S. Batten and Daniel L. Thornton assess the extent to which financial innovation and deregulation of the past few years have affected the relative importance of M1 and M2 as intermediate targets of monetary policy. They investigate the relationship between each monetary aggregate and economic activity over the period that includes the latest two innovations—the introduction of money market deposit accounts (MMDAs) and super-NOW accounts. They find that, while the relationship between M1 and nominal GNP is stronger, in general, than that of M2 and nominal GNP, recent events have had greater confounding effects on the M1-GNP relationship. While this result should motivate continued scrutiny of the relative merits of M1 and M2, it provides no rationale, at present, to conclude that M1 be de-emphasized as an intermediate target of monetary policy.