Given the relationship between money growth and inflation in the very long run, that means that the rate of inflation has no effect on the real equilibrium. In practice, high rates of inflation have proved highly variable, injecting uncertainty into the economy, which can have real effects. 13  Buiter, W. H., 2006, “How Robust is the New Conventional Wisdom in Monetary Policy? The surprising fragility of the theoretical foundations of inflation targeting and central bank independence”, paper presented at the 2006 Central Bank Governors’ Symposium “Challenges to Monetary Theory”, at the Bank of England. 14  For example, Lucas, R. E., 1987, “Models of Business Cycles, 1985 Yrjö Jahnsson Lectures, Basil Blackwell, Oxford. 15  For the genesis of this term in the literature, see Rogoff K., 1985, “The optimal degree of commitment to an intermediate monetary target”. Quarterly Journal of Economics, November, volume 100, number 4. 16  From the vantage point of being Private Secretary to Governor Leigh-Pemberton (1989-1992), and later as an official implementing policy and then heading the Bank’s Monetary Assessment and Strategy Division. BIS Review 66/2007  3  the Bank would not be able to account for its monetary stewardship on the Floor of the House of Commons. In a Parliamentary system of democracy, it is Ministers who are accountable. 17 Those circumstances are specific to the UK. Other conditions and histories act as constraints elsewhere.
Other things being equal, bank balance sheets – and so broad money – would expand, but it might be hard to judge the extent of any inflationary impulse coming through a “shock” to the supply of broad money over and above that stemming from a relaxation in credit constraints and higher asset prices. Also, although a “counterparts” approach to the monetary aggregates would incline one to think that shocks to the supply of credit would flow into broad money, changes in the “technology” of banking and financial intermediation might in some conditions make the connection tenuous. After all, the intermediation of credit occurs via capital markets and not just across bank balance sheets. That could matter, for example, if an increase in the supply of credit happened to occur at much the same time as an increase in incentives or the means for banks to securitise – ie sell – the loans they originate. In the limiting case, a big positive shock to the supply of credit could coincide with shrinking bank balance sheets and so negative broad money growth. That is, of course, not at all what we have 33 seen recently. But the thought experiment underlines two things. First, we need to attend carefully to the underlying drivers. As part of that effort, the Bank has recently launched a new Credit Conditions Survey, which should enrich our grasp of what is going on.