Problems of Monetary Targeting in the UK

The first problem of monetary targeting is why we need it. Here and now the question may seem a trifle démodé or even daring, like asking why we need unions at the Trades Union Congress; but it is not otiose. It may be useful to reach for an answer by standing on a proposition with which almost everyone can agree; that the economy cannot be safely and successfully driven without keeping an eye on the monetary dials. By these I mean the ones which record the relationship between the current stock of money, variously defined, and the flow of spending at current prices, or if preferred, the real stock of money and the current flow of spending at constant prices. What the monetary dials indicate is unlikely to be fundamental for long-run growth, either way, and in the short run readings of the state of the ‘real’ economy deserve equal attention. But to ignore what is on the monetary dials is like keeping a car’s engine in good shape while failing to replace defunct windscreen wipers and worn tyres. Such a driver might claim that he ‘had his priorities right’ but can hardly be regarded as a safe user of the road.