US Federal Reserve at Odds with ECB over Value of Policy Tool Many central banks use monetary…

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US Federal Reserve at Odds with ECB over Value of Policy
Tool

Many central banks use monetary aggregates as a guide to
policy decision, but Bernanke believes US reliance on monetary aggregates would
be unwise because the empirical relationship between US money growth, inflation
and output growth is unstable. Bernanke said that the Federal Reserve had
philosophical and economic differences with the ECB and the Bank of England
regarding the role of money and that debate between institutions is healthy.
Unfortunately, forecast errors for money growth are often significant,
reducing their

US Federal Reserve at Odds with ECB over Value of Policy
Tool

Many central banks use monetary aggregates as a guide to
policy decision, but Bernanke believes US reliance on monetary aggregates would
be unwise because the empirical relationship between US money growth, inflation
and output growth is unstable. Bernanke said that the Federal Reserve had
philosophical and economic differences with the ECB and the Bank of England
regarding the role of money and that debate between institutions is healthy.
Unfortunately, forecast errors for money growth are often significant,
reducing their effectiveness as a tool for policy, Bernanke said. There are
differences between the US and Europe in terms of the stability of money
demand. Ultimately, the risk of bad policy arising from a devoted following of
money growth led the Federal Reserve to downgrade the importance of money
measures.

Source: International Herald Tribune, 10 November 2006

a. Explain how the debate surrounding the quantity theory of
money could make monetary aggregates a less useful tool for policy makers.

b. What do Bernankes statements reveal about his stance on
the accuracy of the quantity theory of money?

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