Monetary Control: Theory, Empirics and Practicalities

The issue of control of the money supply as a means to control inflation is a central area of study in monetary economics. The purpose of this chapter is to present an overview of some of the key arguments in this debate and to present some new evidence which illustrates the difficulties involved in assessing the merits of a policy of controlling the money supply. The overall conclusion in practical terms is rather negative. It is that we have little or no firm evidence that a policy of fairly tight control of a narrow or broad monetary aggregate in the UK is either feasible or desirable now, or in the foreseeable future. Our degree of ignorance is such that apart from the rather weak statement that ‘the authorities will take some form of corrective action if the growth in broad money exceeds 15 per cent p.a. or falls below 3 per cent over a run of years’, there is little the applied economist can constructively say within the framework of a ‘simple policy rule’ for monetary targeting. The above conclusion of course arises from one’s assessment of the range of phenomena addressed by economic theories in this area and of the empirical evidence to back up such theories.