i have stressed that we should take care to avoid talking about money when we mean credit. in a similar spirit, we should be clear when we mean total credit and when bank lending, but without assuming the two are divorced. i have also stressed the need for attention to the underlying drivers of credit conditions throughout the economic cycle. in today ’ s financial system, we may well need richer data on credit quantities and flows outside the banking sector, perhaps along the lines of the us flow of funds statistics. the bank ’ s new credit conditions survey is also designed to give us better qualitative information to put alongside the quantity and price data. even so, as with asset prices more generally, we will sometimes find it hard to distinguish between changes in credit conditions warranted by fundamentals and those that are not. failure to recognise fundamentally warranted and sustainable shifts would deplete welfare. but it is distinctly uncomfortable for the world ’ s central banks to rely entirely on mopping up after a bubble bursts : one imbalance can lead to another. 22 the central banking community does not yet have a satisfactory way through this dilemma. and money? it occupies one end of the liquidity spectrum, and so changes in the quantity of money might potentially affect risk premia, and so credit conditions more generally. gauging that is a formidable challenge. as an input to policy, there is just no alternative to getting one ’ s hands dirty in analysing the monetary data. with an institutional rather than functional definition of broad money, special care is needed not to be misled by shifts in the demand for money from the plethora of non - bank financial institutions. this is important if we are to use money as an indicator of nominal trends alongside survey and financial - market - based measures of inflation expectations. that brings me back to where i began : with our policy reaction function. occasionally the markets will be surprised by our policy decisions. but we should do all we can to avoid confusion about how we think about the economy and about monetary policy strategy. in the spring, my own view of the signals from broad money had not altered materially. so today i have tried to explain how i think about money, credit and the connections between them. that has provided a framework for some observations on the current conjuncture, underlining the need for careful attention to conditions in the banking system. central banks should be, and need to be, well placed to undertake that analysis, which has rarely been

first instance, the expansion of “ liquidity ” represented by faster money growth may sometimes work through asset prices. that is because with imperfect substitution between different kinds of financial assets, relative risk premia may be altered, which in turn may affect borrowing conditions in capital markets. 18 with an appropriate policy response, what should we expect to see in bank balance sheets, in broad money growth, following a credit - supply shock? it might be that the path for broad see kashyap, a. k., r. rajan and j. c stein ( 2002 ), “ banks as liquidity providers : an explanation for the coexistence of lending and deposit - taking ”, the journal of finance, vol. 57, no. 1, pp 33 – 73. acharya, v. v., h. s. shin and t. yorulmazer ( 2007 ), “ fire sales, foreign entry and bank liquidity ”, c. e. p. r discussion paper, no. 6309. see goodhart, c. a. e. ( 2007 ), “ whatever became of the monetary aggregates? ”, peston lecture at queen mary college, london ; king m. a. ( 2007 ), “ the mpc ten years on ”, lecture to the society of business economists, bank of england quarterly bulletin, summer 2007, pp 272 - 85 ; and tucker p. m. w. ( 2007 ), “ central banking and political economy : the example of the uk ’ s monetary policy committee ” speech at the inflation targeting, central bank independence and transparency conference, cambridge, bank of england quarterly bulletin, autumn 2007, pp445 - 52. there is an echo here of a channel stressed by brunner & melter, but with the impulse coming from the central bank ’ s short - term interest rate rather than the quantity of reserves, and the transmission into risk premia and so other asset prices coming via the expected path of the policy rate and broad money rather than via narrow money. money should be unaltered in the medium term. in other words, a persistent acceleration ( or deceleration ) of m4 would be indicative of a nominal shock, jeopardising achievement of the inflation target. the world is not so simple, however. the underlying drivers of the change in the supply of bank lending, and so in broad money, may also bring about shifts in the demand for money, validating