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Will Recent High Growth Rates Of Money Revive Inflation?

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    From the end of 1984 through the middle of 1986, the monetary aggregate Ml growth rate has been extremely rapid by historical standards. The author argues that much of this rapid Ml growth reflects a transfer of funds out of banks' nonmonetary liabilities into banks' negotiable order of withdrawal (NOW) accounts. Prompting this transfer was the fall in market rates relative to rates offered on NOWs. In addition, the level of compensating balances that banks required of their corporate customers appears to have become more sensitive to market rates. Two measures are suggested to increase the usefulness of Ml targeting. The first is to use a shift-adjusted Ml series, that is, a series adjusted for the flow of funds between NOW accounts and time deposits of banks. The second is to adjust Ml targets in light of interest rate changes. Copyright 1987 Western Economic Association International.

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    Article provided by Western Economic Association International in its journal Contemporary Economic Policy.

    Volume (Year): 5 (1987)
    Issue (Month): 1 (January)
    Pages: 41-53

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    Handle: RePEc:bla:coecpo:v:5:y:1987:i:1:p:41-53
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