Otmar Issing of the European Central Bank’s executive board makes the case for using monetary aggregates as part of the monetary policy framework:
Monetary analysis is essential, not old-fashioned, by Otmar Issing, Financial Times: ...Can any central bank afford to ignore ... monetary developments in formulating monetary policy? ... the answer is “no”. It is time to move on from the misguided question of whether analysis of monetary and credit data should play a role in monetary policymaking. ... The European Central Bank ... approach reflects the need for an encompassing assessment of the risks to price stability by cross-checking the indications coming from the economic analysis with those stemming from the monetary analysis. We have ... found that monetary analysis is pivotal in understanding the medium- to longer-term outlook for price stability. Using monetary developments to cross-check the economic analysis ... is crucial... Monetary analysis goes beyond focusing exclusively on developments in one particular aggregate – M3 in our case – to encompass a rich assessment of other measures of liquidity, as well as credit and financial flows and asset prices.
Developing such a rich monetary analysis ... creates communication challenges. ... [T]he ECB has always been transparent about the complexities involved. In our communication..., we strive to offer clear – but not simplistic – messages about the conclusions drawn from the monetary analysis... Confronting such challenges has produced [two] substantial rewards. ... First, our monetary analysis has delivered important signals about ... future price developments, especially at the medium to longer horizons most relevant for monetary policy decisions. Since 1999, the properties of money as an indicator of inflation ... compare very favourably with alternative frameworks.... Of course, the period of comparison is still relatively short.... Definitive conclusions cannot yet be drawn. ...
Second, the monetary analysis has provided a framework within which to identify, discuss and communicate in a timely way the growing challenges posed by financial imbalances and inflated asset prices. It has become widely recognised that, with consumer price inflation well anchored, overly accommodative monetary policies may lead to asset price inflation. ... Further research in this area is needed ... Nonetheless, taking seriously monetary analysis in a broad sense is an important step in this regard.
The ECB’s monetary analysis ... helps to lengthen the horizon of the policymaking discussion and provides a framework for considering asset price and financial imbalances. Indeed, other central banks are considering using a cross-check based on money, credit and asset market developments in their policy frameworks... We are told that assigning an important role to monetary analysis is old-fashioned. ... When price developments are benign, monetary analysis is likely to fall out of fashion. However, we should not wait for inflation to revive before recognising the importance of monetary developments for monetary policymaking.
I am not fully convinced. Monetary aggregates are difficult to measure due in part to the difficulty rapid financial innovation poses for defining consistent aggregates through time. Because of this, aggregates have the potential to give false readings, and they are certainly no replacement for other measures. But if it can be shown that aggregates provide useful information, I am certainly open-minded.