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...

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 Bernanke’s statements reveal about his stance on the accuracy of the quantity theory of money?