March 1990
Federal Reserve Bank of Dallas

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Monetary Aggregates and the Rate of Inflation
Joseph H. Haslag

Some economists advocate focusing less emphasis on monetary aggregates because the relationship of monetary aggregates to the ultimate goals of monetary policy is less reliable now than in the past. But the stability of the relationship between money growth and inflation is a testable hypothesis. Joseph Haslag investigates whether money growth is currently as useful a predictor of inflation as it previously has been. He tests three different measures of money growth: the monetary base, M1 and M2. Haslag finds that the relationship remains stable over time.

Haslag also finds that both the monetary base and M2 are useful in predicting the behavior of the inflation rate. Information that is unique to M1, however, makes a statistically insignificant contribution to predicting inflation.

The Houston economy went from boom to bust to recovery during the 1980s. Expectations of oil prices at $50 per barrel and higher in the late 70s and early 80s stimulated hundreds of oil-related projects in the area. An oil-price decline, however, led the Houston economy into a sharp recession that lasted from 1982 to 1986. The size of Houston's work force shrunk by more than 12 percent with the loss of more than 200,000 jobs. The late 80s brought renewed economic expansion, and Houston regained nearly 120,000 jobs.

Robert W. Gilmer examines the Houston Economic recovery and draws six conclusions about the city's economy with respect to the business cycle, the dollar, and the price of oil. He finds that while the city's renewed growth comes primarily in the service sector, oil and gas industries will continue to play an important role in Houston's future.