The Quantity of Money and Monetary Policy
The relationships among the quantity theory of money, monetarism and policy regimes based on money-growth and inflation targeting are briefly discussed as a prelude to an exposition of alternative views of money’s role in the transmission mechanism of monetary policy. The passive-money view treats the money supply as an endogenous variable that plays no role in that mechanism. In contrast the active-money view, while recognizing money’s endogeneity, nevertheless treats it as having causative significance for the behaviour of output and inflation. It is argued that the active view is more plausible, on both theoretical and empirical grounds. It is further suggested that, notwithstanding the effects of institutional change in the Canadian financial system on the stability of relationships involving the quantity of money, the active view implies the desirability of the Bank of Canada’s paying more systematic attention than it now does to the behaviour of monetary aggregates, particularly narrow ones, in the design and implementation of monetary policy.
|Date of creation:||1999|
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