Monetary policymakers and central banks universally recognize that, in the long run, inflation is strictly determined by monetary policy. However, they disagree sharply about the role of monetary aggregates in the conduct of monetary policy. ; These differences in views are reflected in the way the Federal Reserve and the ECB conduct monetary policy and communicate with the public. At the Federal Reserve, the Federal Open Market Committee no longer specifies targets or monitoring ranges for the monetary aggregates, and committee members seldom mention the aggregates in their deliberations. In contrast, the ECB regularly examines the implications of money growth for the inflation outlook over the medium term to long term. What accounts for these differences of views, and why do the Federal Reserve and ECB see things so differently? ; Kahn and Benolkin examine why the Federal Reserve and ECB differ in their approach to the monetary aggregates and find two main reasons. First, their institutional histories are different. And, second, in the United States and the Euro area, there are differences in the usefulness of monetary aggregates as indicators of future economic conditions over the medium to long run.
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Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.