May 17, 2012 – Monetary authorities should keep an eye on money growth in the economy to help stimulate and monitor the recovery, according to a report released today by the C.D. Howe Institute. In “Money Still Talks – Is Anyone Listening?” David Laidler, Fellow-in-Residence at the Institute, makes the case for policymakers’ paying greater attention to the supply of money, to get a better fix on the economy’s condition. “Money growth isn’t the only key measure to watch, but it is unwise to ignore it,” commented Dr. Laidler, who is Emeritus Professor of Economics at the University of Western Ontario.
Money growth, meaning the pace of expansion in the quantity of money held by the public and readily accessible deposits at financial institutions, is proving prescient in the current situation. “Money growth has been signaling recovery in the US for about a year, and in Canada for about six months. News for Europe and the UK is not as encouraging,” said Professor Laidler. These divergent paths can be traced to the timing and duration of so-called “quantitative easing” QE measures, he said
While skeptics of QE will be inclined to attribute the recent surge of US money growth and signs of recovery in its wake to coincidence, said Laidler, advocates will suggest that QE’s first round in 2009 prevented a collapse of the money supply like the one that turned the initial downturn of 1929/30 into the Great Depression, and that its second round is now promoting recovery.
Canada’s current recovery is still fragile, he said, but a recent step-up in broad money growth is supporting it. The Bank of Canada should take note and keep money growing at around 5 to 6 percent for a while. This does not necessarily require that interest rates be held constant and carries little risk of high inflation, he concluded.
Click here for the full report.
For more information contact: David Laidler, Fellow-in-Residence, or Philippe Bergevin, Senior Policy Analyst, C.D. Howe Institute; 416-865-1904; email: cdhowe@cdhowe.org