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Comments are presented on the article "A Model of the U.S. Financial and Nonfinancial Economic Behavior," by David Backus, William C. Brainard, Gary Smith, and James Tobin, published within the issue. The author discusses a model representing the financial and nonfinancial economic behavior of United States. The decision making processes of households and firms is reviewed. The author discusses the delineation of stock adjustment processes.The problem of institutional change in financial market models and econometric models is mentioned.

This article examines the sources of information that help track down changes in money supply in the U.S. The Open Market Committee begins with a consistent forecast of the money supply, reserves, interest rates, and income, taking account of relationships that link these variables. In light of where they would like income to move in the short run, they set either a rate for federal funds or a level of reserves with the expectation that the influence of that decision on the money supply will, in turn, influence income appropriately. Suppose they develop this forecast on a quarterly basis; and then suppose that, after the first month of the quarter, they get information that the money supply is not where they expected it to be. At that point, they do not have information about the level of income. The deviation in the money supply could, in principle, represent any one of a number of things: a shift in the money demand function; an error in the prediction of one of the exogenous variables that enter into that function; or a deviation of income from its expected value that changed the demand for money. Or it could be a mere measurement error. Now the question is, what information is available that can help the Federal Reserve track down the source of the observed deviation in the money supply from its expected value? One category of such information relates to financial flows.

This section presents comments and discussion on an article by Lester Taylor on the differences in the response of consumers to changes in different types of income as a possible explanation for the major swings in personal saving that have puzzled economists as of June 1971. Several participants argued that the time series data could not provide reliable answers to the important questions posed by Taylor, no matter how much effort and ingenuity he applied. Both Thomas Juster and R. J. Gordon felt that a time span of a single quarter was too short, given the statistical noise in the data and the variability of actual consumer behavior. Gordon noted that, because personal savings is measured residually as the difference between income and consumption, the errors of measurement in both income and consumption get built into the saving series; this may introduce spurious correlations. He suggested experimenting with variables measured as average changes over two or three quarters in an attempt to reduce the influence of quarter-to-quarter noise. Juster warned that even the modest amount of collinearity among variables reported by Taylor could create problems in the multiple regression approach. Moreover, the exploration for lagged effects surely ran into serious collinearity problems in an attempt to pick out the relative strength of relationships of particular variables to a current quarter's saving and previous quarter's saving.