Discussion of the problems in monetary control that the Bank of Essay

Discussion of the problems in monetary control that the Bank of England faces - Essay Example The second issue is exogeneity. This is because existing models of money demand have traditionally treated explanatory variables in theoretical money demand functions as exogenously given (or determined elsewhere). However, consistent estimates of the parameters of the money demand functions are easy to be retrieved (Thomas 1997, p.2). Thomas (1997, p.46) also found out that increases in the stock of money have a strong short-term impact on consumption which conquers the effects of real interest rates. Despite that money is treated as an indicator of economic circumstances facing households, households' response to a variety of economic shocks is a complex dynamic interaction of money, credit and expenditure that interpretation of these shocks' effects on broad money cannot be simply made. As Thomas' study results suggest that there is a strong interaction between personal sector holdings of M4 and consumption, factoring consumption patterns into money demand and supply determination may ease the problem on monetary control. Another solution to the problem is the use of the Divisia money concept.