Non-Nested Specification Tests and the Intermediate Target for Monetary Policy
This paper deals with the problem of choosing an intermediate target for monetary policy. The proposed alternative targets are related to economic activity in non-nested models. The choice among the various alternatives is reduced to a series of tests among non-nested models. The test statistics are constructed by creating an artificial nest in an exponentially weighted combination of the null and the alternative hypotheses. Of the monetary aggregates examined in this paper, M-1 was unambiguously the aggregate most closely related to economic activity for the period 1961 through 1980.
Suggested citation: Toida, Mitsuru, and William T. Gavin, 1983. “Non-Nested Specification Tests and the Intermediate Target for Monetary Policy,” Federal Reserve Bank of Cleveland, Working Paper no. 83-01.