Money - a crucial indicator for measuring monetary policy effectiveness
AMID the hubbub over the European Central Bank's (ECB) stimulus measures in March, an important question got lost: How will anyone know if or when monetary policy is working?
The standard answer for at least a generation has been to look at growth of gross domestic product (GDP) and inflation data, but policymakers and economists are ignoring a much more powerful tool. That's the money supply itself.
Money-supply growth used to be viewed as a crucial indicator for measuring the interaction between central banks and the economy. The theory, which goes back more than 200 years, is relatively simple. More money leads to more transactions, which in modern terms means more GDP. Weak money growth leads to a weak economy.
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