Forecasting the Money Multiplier: Implications for Money Stock Control and Economic Activity
R. W. Hafer, Scott E. Hein, and Clemens J. M. Kool examine one key aspect of monetary targeting: the ability to produce accurate forecasts of the money multiplier. The authors compare two techniques for generating such forecasts. One technique is based on the well-known procedures developed by Box and Jenkins. The second technique, which is derived from a Kalman filter process, represents a relatively new approach to multiplier forecasting. The results indicate that both procedures yield quite accurate monthly multiplier forecasts. In general, however, the Kalman filter approach provides better results; that is, it has a lower average forecast error. The authors then simulate monthly and quarterly money growth rates for the 1980-82 period using both forecasting procedures for the money multiplier, by adjusting the level of the monetary base in line with the ex ante multiplier forecasts. The resulting multiplier forecast/money control procedure significantly reduces the quarterly variability of money growth.