Monetary Policy: Prices versus Quantities

Should the transmission of monetary policy be understood in terms of its impacts on interest rates and bond yields, or monetary aggregates? This article considers the relationship between those aggregates and inflation, both over the past and more recently. And explains how the MPC takes account of “QT” in its forecasts.

Pub. Date
20 November, 2023
Increasing interest rate on the deposit.

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.