Commodity Prices, Money Surprises and Fed Credibilit

STRICT MONETARIST THEORY, IN AN EXTREME FORM, holds that excessive money growth, or the expectation of future money growth, shows up immediately in the rapid inflation of goods prices. However, it is widely argued that for most goods prices are in fact sticky in the short run and reflect money growth only in the long run. If one seeks a sensitive market measure of the perceived looseIless or tightness of monetary policy, one must. look elsewhere than at the general price level. Interest rates, being determined in quickly adjusting financial markets, are free to respond immediately to expectations regarding monetary policy. In 1981 and 1982, every Friday at 4:10 P.M. Eastern Standard Time the Federal Reserve Board would announce the money stock for the week ending nine days previously. If the announced money stock was different from what the market had been expecting, interest rates generally jumped in the same direction. Clearly they were responding to revisions of the expected future path of the money stock. But nominal interest rates are an ambiguous indicator of expectations. On the one hand, an announced increase in the money stock may be received by the market as indicating a higher