The role of money in monetary policy: why do the Fed and ECB see it so differently?
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.
Volume (Year): (2007)
Issue (Month): Q III ()
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- Calza, Alessandro & Sousa, João, 2003. "Why has broad money demand been more stable in the euro area than in other economies? A literature review," Working Paper Series 0261, European Central Bank.
- Hallman, Jeffrey J & Porter, Richard D & Small, David H, 1991. "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?," American Economic Review, American Economic Association, vol. 81(4), pages 841-858, September.
- Joaquim Vieira Ferreira Levy & Alessandro Calza & Dieter Gerdesmeier, 2001. "Euro Area Money Demand; Measuring the Opportunity Costs Appropriately," IMF Working Papers 01/179, International Monetary Fund.
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