But, given insipid and uncertain demand, not a few firms seem to have temporarily suspended part of their capacity: whether by putting part of their workforce on short hours or closing down a production line. This makes it likely that supply conditions are going to depend heavily on the path of aggregate demand. If demand recovers robustly, firms are likely to bring some capacity back on line. If, on the other hand, demand proves anaemic, then suspended-capacity is more likely to be permanently scrapped. Under the first scenario, inflationary pressures could be weaker than would otherwise be the case in a recovering economy. Under the latter scenario, inflationary pressures would be greater than otherwise in a stalled economy. I do not want to go so far as saying that the path of aggregate demand won’t affect inflation, but it may not be quite as potent as usual. Viewed more broadly, provided we do not take risks with inflation – as we must not and will not – the robust-growth path would plainly be preferable as it would avoid wasteful impairment of the economy’s productive potential, and so of living standards in the years  2  See Blinder Alan S. (1987), “Credit Rationing and Effective Supply Failures” Economic Journal, June 1987, 97, 327–52. BIS Review 21/2010  3  ahead.
The counterpart to placing greater weight on the level of and fluctuations in risk premia is being more attentive to money and credit quantities. There is plenty of such interest at present of course, as evidenced by the number of mentions in the minutes of the MPC’s meetings. But we must ensure that interest is sustained. And in a world of global banking and capital markets, that surely means looking at wider measures alongside our normal broad money (M4) aggregates. It is surely not at all uncommon these days for firms around the world to hold part of their currency liquidity with banks overseas. At the Bank, we have had another go 7 at creating a wider measure of UK money growth that takes account of international deposit-taking activity (Chart 13), and also at similar measures of “world money growth” (Chart 14). In both cases, the swings over the past decade are more pronounced on the wider measure, especially for the UK. I am particularly struck that these aggregates start to pick up during late 2003, just about the time when the Bank’s  3  Carney M (2009), “Some considerations on using monetary policy to stabilize economic activity”, remarks to a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming. 4  See Bank for International Settlements (1986), “Recent innovations in international banking”, prepared by a Study Group established by the Central Banks of the Group of Ten Countries, known as the “Cross Report”.