The role of money in monetary policymaking1

In this paper, the conceptual and empirical bases for the role of monetary aggregates in monetary policy making are reviewed. It is argued that money can act as a useful information variable in a world in which a number of indicators are imperfectly observed. In this context, the paper discusses the role of a reference value or benchmark for money growth in episodes of heightened financial uncertainty. A reference value for money growth can also act as an anchor for expectations and policy decisions to prevent divergent dynamics, such as the spiralling of the economy into a liquidity trap, which can occur under simple interest rate rules for policy conduct. The paper concludes that using information included in monetary aggregates in monetary policy decisions can provide an important safeguard against major policy mistakes in the presence of model uncertainty. 1