<abstract xmlns="http://www.w3.org/1999/xhtml"><p> The main purpose of the article is a critical analysis of the monetary policy strategy that is based on the adoption of money supply as an intermediate target. The analysis is conducted from the perspective of the theory of the Austrian school. The first part of the article presents an influence of the supply of money on changes of categories in economy according to mainstream theories of economics. The second part discusses the essence of the strategy of monetary policy using money supply as an intermediate target from the point of view of the main trend in economics. It is demonstrated that in order to use it, two elementary conditions must be met: the function of demand for money must be at least relatively stable and the central bank must practically shape changes in the money supply at the planned level. The third part is of key importance for the purpose of this article. It involves the criticism of Friedman’s principle, i.e. a constant increase in money supply as a monetary strategy. According to the Austrian theory, an increase in the quantity of money which is not financed by voluntary savings separates the time structure of production and consumption. Thus, after the period of prosperity there a collapse in production must take place. It is also pointed out that the crisis can be postponed only when the quantity of money increases at an ever faster rate.</p></abstract>

The main purpose of the article is a critical analysis of the monetary policy strategy that is based on the adoption of money supply as an intermediate target. The analysis is conducted from the perspective of the theory of the Austrian school. The first part of the article presents an influence of the supply of money on changes of categories in economy according to mainstream theories of economics. The second part discusses the essence of the strategy of monetary policy using money supply as an intermediate target from the point of view of the main trend in economics. It is demonstrated that in order to use it, two elementary conditions must be met: the function of demand for money must be at least relatively stable and the central bank must practically shape changes in the money supply at the planned level. The third part is of key importance for the purpose of this article. It involves the criticism of Friedman’s principle, i.e. a constant increase in money supply as a monetary strategy. According to the Austrian theory, an increase in the quantity of money which is not financed by voluntary savings separates the time structure of production and consumption. Thus, after the period of prosperity there a collapse in production must take place. It is also pointed out that the crisis can be postponed only when the quantity of money increases at an ever faster rate.

Money Supply as the Target of the Central Bank

Ph.D. Warsaw University of Life Sciences-SGGW Department of Economics and Economic Policy Nowoursynowska 166, 02-787 Warsaw, Poland

Folia Oeconomica Stetinensia

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

{"article-title":"Money Supply as the Target of the Central Bank"}

The main purpose of the article is a critical analysis of the monetary policy strategy that is based on the adoption of money supply as an intermediate target....

Money Supply as the Target of the Central Bank

Published Online: Dec 11, 2014

Page range: 116 - 136

Received: Jan 13, 2014

Accepted: Jul 01, 2014

DOI: https://doi.org/10.2478/foli-2014-0109

Keywords
money supply, monetary policy, Austrian school, business cycle

© University of Szczecin

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Money Supply as the Target of the Central Bank

Published Online: Dec 11, 2014

Page range: 116 - 136

Received: Jan 13, 2014

Accepted: Jul 01, 2014

DOI: https://doi.org/10.2478/foli-2014-0109

Keywordsmoney supply, monetary policy, Austrian school, business cycle

© University of Szczecin

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Keywords
money supply, monetary policy, Austrian school, business cycle