It turned out that monetary aggregates
were difficult to control and attempting to do so caused a significant rise in the volatility of interest rates and inflation.
Monetary and Financial Statistics Manual (MFSM) of IMF states that, "The Financial instruments with higher transaction cost (with relatively less liquidity) can be classified under broader monetary aggregates
and vice versa" (IMF, 2000).
At the Federal Reserve, the Federal Open Market Committee (FOMC) no longer specifies targets or monitoring ranges for the monetary aggregates
, and committee members seldom mention the aggregates in their deliberations.
If velocity is variable and unpredictable, the relationship between money and prices is difficult to characterize, and monetary aggregates
can't help policymakers track inflation.
BOX 1 Monetary aggregates
M1: Currency held by the public + Travelers checks + Demand deposits + Other checkable deposits, including NOWs (negotiable orders of withdrawal accounts), ATS (automatic transfer services), and share draft account balances.
A key requirement for monetary aggregates
to provide a useful role in guiding monetary policy is that they should be stably related to the objectives of policy, such as inflation or nominal income growth.
Front a cursor' examination of Figures 4 and 5, one might conclude that the monetary authority is not responsible for the Great Depression because the contraction in the real economy (industrial production, the increase in unemployment) preceded any notable contraction in monetary aggregates
Central banks around the world became convinced of the importance of money as a policy control variable and confident in the use of monetary aggregates
as intermediate monetary targets just at a time when everything started to go embarrassingly wrong.
The very flexible approach to monetary targeting -- for exampl e, the Bundesbank missed its target ranges on the order of 50 percent of the time -- was adopted because the relationship between monetary aggregates
and goal variables, such as inflation and nominal income, has not remained strong or reliable in Germany and Switzerland, or in other industrialized countries.
This scenario is especially relevant in today's economic environment, where money growth as measured by some monetary aggregates
has been relatively strong over the past couple of years.
As in previous years, the Committee interpreted the ranges for the broader monetary aggregates
as benchmarks for what money growth would be under conditions of price stability and sustainable economic growth, assuming historically typical velocity behavior.
Nakahara said it is necessary "to demonstrate as clearly as possible the bank's critical view of the condition of the economy," adding he considered it appropriate to slightly lower the level of the unsecured overnight call money rate "to give what boost possible to monetary aggregates