In the Loughborough University Banking Centre Lecture in Finance, the Governor examines the reasons why broad money has grown faster than expected in recent years, and the implications of this rapid growth for inflation.
The targeting of broad monetary aggregates is itself an intermediate objective, the fundamental aim of policy being to squeeze out inflation progressively and create a strong and growing economy: and this objective has been chosen in the belief that there was a reasonably stable relationship between the rate of growth of broad money and the rate of growth of nominal incomes. Since 1980, however, this relationship in the United Kingdom has become increasingly unpredictable, with the velocity of broad money falling by 4% a year, and that of £M3 falling at an accelerating rate.
The implications for inflation of the rapid growth of broad money depend on why it has occurred. In addressing this question, the Governor reviews the main influences on the changing behaviour of financial intermediaries since 1980 and the partly related changes in the behaviour of the other sectors of the economy; and identifies therein a number of ways in which broad money is likely to have been increased by financial change.
In conclusion, the Governor raises the question whether, given these problems-essentially technical and related to the form, not the substance of policy-it might not be better to dispense with a target for broad money.