If there is one area where Europeans are from Mars and Americans from Venus, it is monetary policy and the role of monetary aggregates. Last week, the world's two most prominent central bankers publicly disagreed. Jean-Claude Trichet, European Central Bank president, argued in the Financial Times why monetary analysis would remain an essential part of the ECB's tool kit. Ben Bernanke, US Federal Reserve chairman, said a central bank would be unwise to rely too heavily on money since financial innovation had been causing disturbances to monetary statistics.
It seems at first like an ancient Keynesian-versus-monetarist debate but this is not so. For a start, this is about the role of money, not monetarism, the theory that postulated that central banks should target the money supply to stabilise inflation over the medium term. Even the ECB does not go that far. Monetarism did - and still does - suffer from the devastating critique of Goodhart's Law, which says that the predictable relationship between money and inflation breaks down when policymakers start to exploit it.
