U.S. Federal Reserve at Odds with ECB over
Value of Policy Tool
Financial innovation and the spread of U.S. currency throughout the world has broken down
relationships between money, inflation, and
output growth, making monetary gauges a less
useful tool for policymakers, the U.S. Federal
Reserve chairman, Ben Bernanke, said. Many
other central banks use monetary aggregates
as a guide to policy decision, but Bernanke
believes reliance on monetary aggregates would
be unwise. “There are differences between the
United States and Europe in terms of the stability of money demand,” Bernanke said.
Source: International Herald Tribune ,
November 10, 2006
a. Explain how the debate surrounding the
quantity theory of money could make
“monetary gauges a less useful tool for
policymakers.”
b. What do Ben Bernanke’s statements reveal
about his view on the accuracy of the quantity
theory of money?
Mathematical Note