A Test of the Demand Rule

For nearly a decade, I have argued that the Federal Reserve should maintain a target path of total demand in the American economy. The best measure of total demand, I suggest, is what the Department of Commerce calls “final sales to domestic purchasers.” This aggregate is equal to nominal gross domestic product minus the change in private inventories minus exports plus imports. In recent years, given the increasing trade deficit, this aggregate has grown somewhat faster than nominal GDP. The primary reason for selecting domestic final sales as the best measure of total demand is that the demand for money in the United States appears more closely related to final purchases by Americans than to the dollar level of total output by Americans.