Money still makes the world go round: The zonal view

Abstract

Many monetary economists have come to regard the monetary aggregates as obsolete measures of the monetary policy stance. This critique has led some to view money as having lost its central role in the conduct of monetary policy. We say to those advocating excising money from monetary policy, "Not so fast." To better understand the potential role for money, we develop a zonal view of monetary policy which reflects the historical regularity for the relative informativeness of the quantitative measures of monetary policy, such as the monetary aggregates, and real interest rates to depend on the inflation zone in which a central bank finds itself. The zones range from high inflation (zone 1) to deep deflation (zone 5), with intermediate zones of moderate inflation (zone 2), low inflation (zone 3), and low deflation (zone 4). © 2007 by the European Economic Association.