John A. Tatom argues that triple-digit deficits in 1982 and 1983 arose largely from the strong cyclical downturn in the economy, not from policy actions such as increased defense spending, recent “cuts” in personal income taxes, or burgeoning transfer programs.
R. W. Hafer notes that there have been increasing suggestions that monetary policymakers should use the information from a variety of economic measures rather than focusing solely on the behavior of a monetary measure, such as M1. Although this approach to policy is by no means new or novel, suspicion that M1 has deteriorated as a useful policy measure in the wake of financial innovations has re-kindled the debate.
Dallas S. Batten and Daniel L. Thornton point out that, since it was first used in 1968 to investigate the relative importance of monetary and fiscal actions in influencing economic activity, the St. Louis equation has been subject to much criticism. One criticism is that the policy conclusions may be dependent on the equation’s econometric specification and, in particular, on the use of Almon’s polynomial distributed lag estimation technique.
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