Importance Of Money And Credit

Abstract

The thesis of this paper is that the Federal Reserve could better achieve their goals if they paid more attention to quantity targets of both money and credit. The rapid growth in credit that ended in the credit crisis of 2007 and 2008 might have been avoided had the Federal Reserve attempted to incorporate quantitative credit measures in assessing policy. But their focus on short-term interest rates in conducting monetary policy to the exclusion of credit measures led to inaction on their part. The stability of the demand for money and credit determined by this analysis suggests the Federal Reserve could have taken policy steps early in this cycle – jawboning, quantitative and regulatory – to temper the credit bubble and potentially avoid the credit crisis.