Monetary Policy: Prices versus Quantities

Main Points

• No monetary policymaker should ignore information that is relevant for future inflation. That includes the monetary aggregates. However, they need interpretation. The strongest claims that QE inevitably leads to rapid growth of commercial bank deposits on a par with that in the central bank’s balance sheet; and that this, in turn, inevitably leads to excessive inflation—are not well supported by the evidence.
• It is better to understand the impact of QE through the lens of asset prices— what it does to bond yields—than quantities (still less as ‘printing money’).
• As with commercial banks, the demand for central bank money can change abruptly.