Monetary Economic Myth and Econometric Reality

Few of the main macro-economic forecasting systems can produce sensible forecasts without the tender loving care of their proprietors. Many econometric equations in com mon use show significant deterioration in the accuracy with which they characterise data as time passes. And many economists are sceptical about empirical evidence, feeling it lacks "credibility". Monetary relationships have the dubious distinction of being among the leaders in this field, as witnessed by the very large mispredictions of M1 models in the USA over what is now known as the "missing money" period (1973-76) as well as during the recent "great velocity decline" (1979-82). In the UK, models of M1 and M3 demand experienced large "structural breaks" following the Competition and Credit Control regu lation changes and the move to Floating Exchange Rates. Perhaps it is no surprise that "Goodhart's Law" should have been formulated with respect to money demand equations.

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