Dancing on the grave of monetarism

The Bank of England's monetary policy committee seems to be dancing on the grave of monetarism. Today's minutes (pdf) show that two members of the committee voted to cut interest rates earlier this month. This is despite the fact that figures at the time showed that the M4 money stock had grown by 10.8 per cent in the previous 12 months; subsequent figures show that growth has accelerated to 11.6 per cent, the fastest real increase  since 1996.
However, this warranted just a single line in the minutes; it "raised questions about the extent of the weakness in domestic demand." There's no reference to this in the discussion about the immediate policy decision.
But should the committee pay more attention to the boom in bank deposits? Eyeball econometrics suggests so; accelerations in real M4 in 1987, 1995 and 2000 all led to accelerations in consumer spending. This paper has even found that real  M4 "provides the best single leading indicator of recessions." And common sense says we should at least think about why money demand has risen. To argue that it has no implications for future demand and hence inflation, one must show that there has been a permanent increase in the demand to hold bank deposits. Why might this have happened at a time when real interest rates are relatively low and when stock markets are rising?
Perhaps, therefore, the MPC is tempting fate by dancing on the grave of monetarism. As one prominent economist has said (pdf):

The absence of money in the standard models which economists use will cause problems in future, and...there will be profitable developments from future research into the way in which money affects risk premia and economic behaviour more generally.

Who said that? Bank of England Governor Mervyn King, that's who.

Comments

[dearieme]

Why did Lawson give up on monetarism? Why did he replace it by "shadowing" the Deutschmark, which meant that he was 'steering'the British economy by reference to German money supply figures rather than British ones?
We laymen can find such things a bit of a puzzle.

[Patrick Crozier]

I seem to remember the argument was that no one could decide which measure of money to use.

In his biography, Lawson devotes about a paragraph to this. His argument was that we would never be able to impose the necessary discipline on ourselves so we needed someone from outside to do it.

Does date it somewhat.

[Angry Economist]

Lawson got a lot of things wrong, like causing the recession of the late 1980s. Did this blunder lead him to ditch his monetarist stance? Personally I think that there has only ever been 'pretend' monetarism in the UK.

Most 'monetarist' stances were never fully monetarist anyway but always used other economic tools which would have made Friedman et al shiver.

The problem with measuring money was that they didn't use to count credit card debt as money. So they underestimated the demand for money.

[dearieme]

I think the Lawson case is interesting because there's a good chance that it was just a matter of intellectual error, rather than the usual political chicanery. No danger of anyone ever attributing any part of Toni's record to intellectual anything, eh?

[rjw]

Chris Dow and Iaian Saville - both former Bank of England economists, wrote a very interesting book on british monetary policy , including the monetarism experience - and why it was all rubbish. Very good read. Very instructive.