Successful Central Banks Can Afford to Pay Scant Attention to Money

Abstract

In the last few decades, central bankers and economists have paid little attention to monetary aggregates, in contrast with the experience of the 1970s and the 1980s. Our evidence shows that monetary aggregates lose relevance when central banks maintain low and stable inflation, as has occurred in recent decades. However, to move from unstable to stable inflation, our findings also show that attention to monetary aggregates is needed. Our findings help resolve the long-standing controversy about the importance of monetary aggregates for the conduct of monetary policy: monetary aggregates are vital to move from unstable to stable inflation but lose relevance once a central bank has consistently reached price stability.