Money Supply Targeting

SkintEastwood

got an economics exam tomorrow and just looking for help re:money supply targeting. its only likely to appear as a short question so all i need is a brief description. i've been on google for ages trying to find an easy to follow explanation but with no joy. any help would be much appreciated.

Skint

Économiste Monétaire

I’m not sure how brief an answer you’re requesting, but I’ll try to keep it short and really simple. Monetary targeting, or money supply targeting, is a policy advocated by monetarists like Milton Friedman. The idea is to keep a constant growth in the money supply regardless of demand for money, and focus on that number. It's the antithesis of focusing on the direct setting of interest rates, or policies advocated by Keynesians. It was prevalent in the late ‘70s and 1980s as a way of combating inflation; and in some ways is still around today with institutions like the ECB and the BoE having loose monetary aggregate growth targets. Monetarists argued that demand for money was stable, Keynesians argued the opposite case.

The task of monetary targeting is quite difficult because a central bank doesn’t have complete control over the money supply, it fluctuates. The targeting was on the broad money supply, or M3--the definition “money” differs in each area which could be labelled M3, M4, M5 and with different inclusions as to what those definitions contain. With financial innovation came ever more liquid assets and so the money supply could change far more frequently, and over time definitions of money have changed. Interest rates can fluctuate wildly with market demand for liquidity, especially as financial institutions fund their operations more and more on wholesale interbank funds, as opposed to your average Joe requestion currency. You also have lags in money supply targeting, which are more protruding than setting interest rates (you can track interest rates daily, you need to compile accurate statistics from all financial institutions for monetary targeting). So, you may not know if you’re policy is even working, actions you take have unknown consequences, in detail, for over a month.

Money supply targeting also had the monetarist assumption of constant velocity of money, or that velocity evolves slowly, which isn’t accurate, really. In the 1980s it was judged, by different institutions, to be too difficult to keep rigid monetary targets. Also, the wild fluctuations in money market rates wasn’t particularly welcome. Interest rate setting with a view to specific inflation targets is the paradigm of most central banks today (the Fed is slightly more complicated).

I don't know how simple of an answer you want... and it's late

Edit: Oh, and good luck with the exam

SkintEastwood

thanks you very much for the reply and for wishing me luck in my exam. i should of come here to do all my study:D

Économiste Monétaire

SkintEastwood wrote: »

thanks you very much for the reply and for wishing me luck in my exam. i should of come here to do all my study

You're welcome.