Question

Explain the relationship between banks and money policy

Answer 1

REMEMBER when monetary policy was all the rage in the late 1970s and the early 1980s? The markets would be on tenterhooks for the weekly M1 numbers from the US; in Britain, Patrick Minford and Tim Congdon would battle it out over whether narrow money or broad money was the measure to follow (or maybe it was the other way round). An appearance by Milton Friedman on the BBC with a whole array of charts convinced my brother and father that it was all quite simple; control the money supply and inflation would vanish. Then suddenly we realised that monetary aggregates misbehaved when targeted (Goodhart's law) and the certainty vanished. Monetary targerts were dropped; direct inflaiton targeting replaced it.