U.S. Federal Reserve Chairman Ben Bernake warned Friday that monitoring money flows is no longer a reliable measure for gauging economic growth or inflation, Reuters reports.
The money supply considers the liquidity of currency, bank deposits and money market mutual funds.
“Forecast errors for money growth are often significant, and the empirical relationship between money growth and variables such as inflation and nominal output growth has continued to be unstable at times,” Bernake told attendees of a European Central Bank conference held in Frankfurt.
In the past, money supply analyses helped the Fed gauge the need for money supply growth. That practice ended in 2000 when the correlation between supply and performance became so unreliable, it forced statutory reporting requirements to lapse.
Innovation and product development are, in part, to blame for the weakening link, Bernake said. Another factor affecting the relationship between money supply and economic performance is the fact that several overseas entities hold a significant amount of U.S. currency.
Still, he said, monitoring money can offer guidelines.
“Attention to money growth is thus sensible as part of the eclectic modeling and forecasting network used by the U.S. central bank,” the Federal Reserve chairman said.
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.