Maintaining Low Inflation: Money, Interest Rates, and Policy Stance

This paper examines the usefulness of considering monetary aggregates when assessing monetary policy stance, and contrasts monetary analysis to the current mainstream monetary policy analysis. Monetary developments, unlike interest rate stance measures, are shown to provide quantitative information on subsequent price levels. Moreover, ignoring money and focusing on interest rates and real activity measures neglects crucial information as short-term velocity movements are fully part of the monetary policy transmission process. The analysis also sheds light on the recent change in inflation volatility and persistence as well as on the Phillips curve flattening. The empirical analysis is based on US data since the 1960s as well as euro area and Swiss data since the 1970s.