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Some Issues of Monetary Policy

Published online by Cambridge University Press:  26 March 2020

David Savage
David Savage*
Affiliation:
National Institute of Economic and Social Research
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Extract

The policy debate which preceded the introduction of monetary targets by and large avoided the practical problems of controlling the money supply. Frequently, the impression was given that the money supply is an exogenous policy instrument, subject to exact measurement and precise control. In reality, the money supply is not a label for a rigorously defined single statistic, but a term describing a concept, or rather several distinct concepts, for which numerous different statistical representations have been proposed. The authorities cannot simply exogenise the money supply (on some definition or other); they can only affect it indirectly by influencing the actions of banks and depositors through, for example, the raising of Minimum Lending Rate or the imposition of the corset. In other words, the money supply is not an instrument but an intermediate target, a target which, given existing instruments and the existing institutional setting, is not at all easy to hit.

Type
Articles
Information
National Institute Economic Review , Volume 91 , February 1980 , pp. 78 - 85
Copyright
Copyright © 1980 National Institute of Economic and Social Research

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References

Notes

(page 78 note 1) D. Savage, ‘Monetary targets and the control of the money supply’, National Institute Economic Review, no. 89, August 1979.

(page 80 note 1) More precise definitions of the statistical series and their sources are as follows.

M1 and £M3 : Official estimates. Sources: Economic Trends, Financial Statistics.

L1 and L2: L1 is defined as the sum of personal sector and industrial and commercial company holdings of notes and coin, bank deposits, and deposits of other financial institutions. L2 is L1 plus personal sector and industrial and commercial company investments in National Savings, tax instruments, local authority debt, and Treasury bills. Stock series were constructed by cumulating flows from benchmarks. Sources: Financial Statistics, Bank of England Statistical Abstract, Numbers (1) and (2).

C: C is the stock of bank loans, H.P. loans, housing loans, and ‘other’ loans extended to the personal sector and industrial and commercial companies. Stock figures were obtained, once again, by cumulating data on changes, from the flow of funds accounts, from benchmarks. Sources: as L1 and L2.

(page 80 note 2) The rate of inflation is measured by the implicit GDP price deflator, which is a more comprehensive index of the general price level than, for example, the more familiar retail price index which only covers the prices of consumer goods and services.

(page 80 note 3) Although the practice of announcing explicit monetary targets was not adopted until December 1976, control of the money supply had been an internal objective of the Bank since 1974.

(page 83 note 1) Brian Grifhths, ‘The reform of monetary control in the United Kingdom’, Centre for Banking and International Finance Annual Monetary Review, Number 1, October 1979.

(page 83 note 2) ‘A proposal for the control of the UK money supply’, Economic Journal, March 1978.

(page 83 note 3) This view expressed in ‘Monetary base control’, a special article in the Bank of England Quarterly Bulletin, June 1978. See also The London Clearing Banks evidence to the Wilson Committee, November 1977, chapter 6.

(page 83 note 4) Examples of this can be found in other countries, such as the United States and West Germany, which have attempted to use variable reserve requirements as an instrument of money supply control.

(page 84 note 1) The PSBR differs from the net acquisition of financial assets of the public sector (the financial deficit) by certain financial transactions. For simplicity, the net acquisition of financial assets of the banking sector is assumed zero.