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The Importance of M

- "Money matters, but it is better to look at money flows instead of money stocks, and sometimes it is necessary to look at the counterpart of money, credit, to see what is going on."
- "We argue in this note that if the equation of exchange—which is at the heart of the Quantity Theory of Money (QTM)—is recast in terms of money flows rather than money stocks, then the velocity of money proves to be more stable, and changes in money have more direct implications for nominal activity. We find empirical support in the euro area for this relationship. Latest money flow readings still point to an expansionary impulse, though its strength may be receding in coming months."
- "When non-bank sources of credit are creating non-bank money in significant amounts, as is the case in the US or the UK, measures of money relying on bank balance sheet data no longer capture actual monetary developments. In this case, it is necessary to analyse the counterpart of money, credit, as we have done with our credit impulse measure over the last two years. The latest data suggest that the credit impulse in the US and the UK has remained positive, giving continuing support to the recovery."
- "An important task for policy makers is to smooth the credit (and hence money) cycle, among other things by countering both excessive optimism and excessive pessimism in credit markets. Policy makers failed to do the former during the credit boom, but they were quick off the mark doing the latter when the bubble burst. After excessive optimism and pessimism a return to realism is now needed. As this happens, growth may well fall short of the levels reached during the credit boom as fewer but economically more viable projects will be funded. Monetary policy that ignores the diminished potential of the economy, risks fuelling another money and credit driven cycle."



DeutscheBank Global Economic Perspectives 20100915

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