This paper proposes a measure of monetary impulse that is intended to reflect the medium-term inflationary implications of a country’s current monetary policy. The measure has been designed to be relatively uniform across the major industrial countries, and it could serve as a complement to the country-specific indicators that are relied upon for policy analysis and discussion.
The proposed measure consists of the growth rate of the monetary base, adjusted for reserve requirement changes and augmented by an implicit forecast of future growth rates of base velocity. Because this forecast is based on past velocity growth--its average value over the previous four years--the impulse statistic reflects an easy-to-calculate measure of a variable that could be accurately controlled by any central bank that chose to do so. Other controllable reserve aggregates could be considered instead, but the monetary base has the desirable property of reflecting the effect of open market purchases on both reserves and currency. Thus, if adjusted for changes in reserve requirements, the base provides a reasonably comprehensive summary measure of the actions of the central bank. The velocity adjustment term is designed to incorporate effects of technological and regulatory change in the payments and financial industries, and thus the impulse measure should also be useful for analyzing policy stances in the future.
Given the velocity-growth feature of the proposed measure, its magnitude at any time will reflect the implied medium-term growth rate of nominal GDP. The inflationary implications are then readily obtained from a comparison of this figure with the trend growth rate of real GDP for the economy in question. Figures for each of the seven major industrial countries present time series of the impulse measure together with bands reflecting an appropriate sample average annual rate of real GDP growth plus 1 to 3 percentage points. These bands then represent a low-inflation range centered on a rate of 2 percent. The figures serve as the basis for a discussion of the inflationary experiences of 1965 through 1993 for each of the economies and suggest that the impulse measure usefully characterizes monetary policy behavior and its consequences over those years.
To assess the impulse measure relative to other widely used monetary indicators, an additional set of figures for each country presents the impulse measure together with time series on consumer price inflation, the yield curve slope, and growth in a broad monetary aggregate. The impulse measure tracks inflation much more consistently over time than does the yield curve slope indicator, although changes in the yield curve slope have served in some periods as a signal of a change in monetary stance. The proposed impulse measure performs at least as well as the broad money growth measure in almost all countries, and in several cases the impulse measure signals future inflation more closely and more consistently over time.