European Central Bank: “our money growth target is obsolete”
The ECB has published an important study about ‘money’. It investigates how recent and not so recent institutional changes have changed the ‘nature’ of the M-3 definition of money which the ECB uses to set its rigid 4,5% money growth target. Warning: it’s a boring read. But the conclusion is straightforward and exciting: financial innovation has made this core money growth target of ECB policy, enshrined in official documents and many, many speeches and press releases, obsolete as money isn’t anymore what it used to be:
>”A lengthening of the financial intermediation chain typically implies more non-monetary financial intermediaries in the economy and therefore that more money is held by these intermediaries. This tends to result in a decrease in the overall share of money growth that is motivated by consumption or real investment transactions.”
>”Developments in sectoral money holdings therefore provide helpful insights into whether changes in overall M3 growth reflect changes in the underlying rate of monetary expansion, as well as into the channels through which the link between money growth and consumer price inflation operates.”
In other words: it matters if money is held by banks, households or corporations – and the relationship between these sectors as well as the relationship between money growth and the price level changes all the time. The report also states that asset price increases (i.e. house price increases) can be considered a kind of inflation which is fuelled by loose credit (they do state this a bit different, of course). And it contains very useful ‘boxes’ defining all the monetary actors as well as the financial bonds between them, a kind of ‘everything you always wanted to know’ information.
Summarizing: the report effectively deconstructs as well the ECB money growth target as well as, by implication, the official ECB inflation target (which is explicitly defined as consumer price inflation) as well as the ‘hydraulic’ monetarist idea that there is one and only one right money growth target forever and ever (which is the basis of ECB policy!) and gives indispensable information about the structure of the financial sector.
They of course try to make it sound very conservative. But something is changing at the ECB.