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Monetary Analysis and Central Banks: Introduction

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Abstract

Intellectual and historical background, with particular reference to the high-powered money multiplier analysis developed by Friedman and his associates; the Polak model developed at the International Monetary Fund (IMF), which served as the basis for IMF financial programming; the credit counterparts/flow of funds approach used more in Europe, including the UK; the rationale for and experience of monetary targeting, from adoption to abandonment, with particular attention to the USA and France; the experience of developing/emerging countries with an emphasis on data availability and an example in the form of Egypt; and the role of quantitative easing in a possible revival of interest in monetary analysis.

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Notes

  1. 1.

    While monetary analysis typically requires demand for money theory in order to produce constructive implications and predictions, that theory is relatively settled (Laidler, 1993), so the focus here is on the supply side.

  2. 2.

    The chairman of the Federal Reserve at that time, Ben Bernanke, in particular, had worked on the Great Depression (Bernanke, 2004). See von Hagen (2009) for a nice comparison between policymakers’ responses to the two events, with an emphasis on the relevant multipliers.

  3. 3.

    We use the more modern notation found in Agénor’s presentation of the model (2000, Chap. 9) rather than Polak’s original notation.

  4. 4.

    Polak (2002) discusses the similarities and differences, referring to his own model as Keynesian and emphasising its descent from Keynesian multiplier models in the 1930s and 1940s, particularly as developed in the Netherlands.

  5. 5.

    Before those interventions, the Bank of England did not publish consistent series for any monetary aggregates, and monetary issues barely figured in official or public discussion of economic policy.

  6. 6.

    This version separates the central bank from the rest of the official sector, in line with current emphasis on central bank independence. Earlier expositions, for example, Artis and Lewis (1991), combined the two.

  7. 7.

    Time-inconsistency dates from Kydland and Prescott (1977), and the lag between academic and policy circles was much longer then than it is now.

  8. 8.

    Bernanke, Laubach, Mishkin, and Posen (1999, Chap. 4); see also Bernanke and Mihov (1997).

  9. 9.

    See also Cobham (2002, Chap. 3), which shows that there was no consistent relationship between the implicit or explicit money GDP forecasts and the target ranges. He also argues that the targets were not consistent with the authorities’ likely forecasts of the credit counterparts. He concludes that targets were set above all on a political basis with an emphasis on the short-run announcement effects.

  10. 10.

    See also Goodhart (1975, Chap. 8; or 1989, Chap. 6).

  11. 11.

    This agreement was enshrined in the joint Bank-of England-Treasury White Paper, Monetary Control, Cmnd. 7858, March 1980. See Goodhart (1991) for further details.

  12. 12.

    In the UK, monetary targeting, particularly in the early 1980s, depended heavily on ‘overfunding’—selling more debt than the budget deficit, so that DEF − ΔGD nf was negative and could therefore offset in part the unexpectedly high levels of bank lending ΔL. Nevertheless, this led to increasingly large and undesirable distortions in the money markets.

  13. 13.

    See Bernanke and Mishkin (1992).

  14. 14.

    See Hetzel (2008, appendix to Chap. 11), and Friedman (1996).

  15. 15.

    The analytical source often cited for the rejection of attention to the monetary aggregates is Woodford (2003), but it is clear that monetary economists in the USA concerned with policy questions had abandoned the aggregates long before that.

  16. 16.

    Banque de France, Rapport AnnuelExercice 1997, p. 62.

  17. 17.

    This subsection draws on Al-Mashat (2009, 2011) and Selim (2011). I am grateful to Rania Al-Mashat for comments on an earlier version.

  18. 18.

    See the CBE’s Annual Reports for 2011/2012, 2012/2013, and 2013/2014.

  19. 19.

    For the USA, see the press statement of 18 March 2009, available at http://www.federalreserve.gov/newsevents/press/monetary/20090318a.htm.

    An earlier paper setting out the idea of QE had referred to it as ‘buying or selling securities to affect the overall supply of reserves and the money stock’ (Bernanke & Reinhart, 2004, p. 87). For the UK, see the press statement of 5 March 2009, at http://www.bankofengland.co.uk/publications/news/2009/019.htm, and the Minutes of the MPC meeting at http://www.bankofengland.co.uk/publications/minutes/mpc/pdf/2009/mpc0903.pdf.

  20. 20.

    See, for example, von Hagen (2009), Cobham and Kang (2012).

  21. 21.

    Even before the crisis, Goodhart (2007) had argued that the monetary aggregates had been too completely forgotten.

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Cobham, D. (2016). Monetary Analysis and Central Banks: Introduction. In: Cobham, D. (eds) Monetary Analysis at Central Banks. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-137-59335-1_1

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