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Lecture Money, banking, and financial markets (3/e): Chapter 20 - Stephen G. Cecchetti, Kermit L. Schoenholtz

Chapter 20 - Money growth, money demand, and modern monetary policy. The goal of this chapter is twofold: To examine the link between money growth and inflation in order to clarify the role of money in monetary policy, and to explain the logic underlying central bankers’ focus on interest rates. | Chapter Twenty 20- Introduction It would be easy to form a clear impression that 21st-century monetary policy has very little to do with money, despite its focus on inflation. Everyone talks about interest rates and exchange rates; no one talks about money. But you will find that central bankers and monetary economists do care about money. We see concern for money, too, in statements made by officials of the ECB. 20- Introduction The FOMC, in July 2000, decided to stop publishing target ranges for the monetary aggregates. They explained that “these ranges [no longer] provide useful benchmarks for monetary policy.” The FOMC rarely makes any references to money in public announcements of the federal funds target rate. 20- Introduction What accounts for the distinctly different treatment of money growth in the two largest central banks in the world? The goal of this chapter is twofold: To examine the link between money growth and inflation in order to clarify . | Chapter Twenty 20- Introduction It would be easy to form a clear impression that 21st-century monetary policy has very little to do with money, despite its focus on inflation. Everyone talks about interest rates and exchange rates; no one talks about money. But you will find that central bankers and monetary economists do care about money. We see concern for money, too, in statements made by officials of the ECB. 20- Introduction The FOMC, in July 2000, decided to stop publishing target ranges for the monetary aggregates. They explained that “these ranges [no longer] provide useful benchmarks for monetary policy.” The FOMC rarely makes any references to money in public announcements of the federal funds target rate. 20- Introduction What accounts for the distinctly different treatment of money growth in the two largest central banks in the world? The goal of this chapter is twofold: To examine the link between money growth and inflation in order to clarify the role of money in monetary policy, and To explain the logic underlying central bankers’ focus on interest rates. 20- Why We Care about Monetary Aggregates The single most important fact in monetary economics: The relationship between money growth and inflation rates. Panel A of figure 20.1 shows the average annual inflation and money growth in 150 countries over the 2 1/2 decades from 1981 to 2005. 20- Why We Care about Monetary Aggregates Two things are striking: Some countries suffered inflation of more than 500 percent a year for two decades. Every country with high inflation has high money growth. Panel B shows the large number of countries with low inflation and low money growth. To avoid sustained episodes of high inflation, a central bank must be concerned with money growth. Avoiding high inflation means avoiding persistent rapid money growth. 20- Why We Care about Monetary Aggregates 20- Why We Care about Monetary Aggregates Figure 20.2 shows: Points lying