– rather a long walk, i ’ m afraid – through these various points. less ink is spilled on the second question, concerning qt : should the mpc not include in its forecasts some identifiable and separate effects of asset sales on activity and inflation? having argued that the policy is transmitted to demand and inflation largely via asset prices my answer to this will be “ no ”. the committee has said that the size of the asset purchase facility ( apf ), the vehicle through which qe and qt are conducted ) will be reduced gradually and predictably and, to that end, announced last september the exact planned reduction of the apf over the following twelve months. as such, it ’ s reasonable to suppose that the impact of qt, even in prospect, is already captured in the prices of assets on which we condition our forecasts. to add something else would be to double - count the effect. macro models and the determination of demand as an undergraduate one of the books i had to read was a collection of essays about monetary economics by one of my lecturers, frank hahn. it begins with this rather provocative sentence : “ the most serious challenge that the existence of money poses to the theorist is this : the best developed model of the economy cannot find room for it ”. as a newcomer to the subject i found this a bit concerning ( not to say alarming ). if economics can ’ t even say why money exists how can it hope to explain what it does? reading on, one ’ s concern subsided a bit. hahn was, by training and inclination, a general equilibrium theorist. for him, as he explained in the very next sentence, “ the best developed model of the economy ” was the highly stylised description developed by the great economic theorists ken arrow and gerard debreu. for all its sophistication, the arrow - debreu model is one in which, by assumption, trade is entirely costless. in this perfect economy there ’ s a market and a price for the exchange of any two goods or services – including those for future delivery – without the need for a medium of exchange or any sort of costly financial architecture. so it ’ s not a huge surprise that, having ruled out at the start the conditions that might require it, this model should “ have no place ” for money. what hahn ’ s bit of rhetoric does suggest is that you need some sort of financial friction – some departure from the platonic realm of

, it would reduce the size its size by £80bn over the following year. readers who ’ ve come this far will be glad to hear that this section will be pretty brief because i ’ ve actually gone through the main points already. there are two. first, because the impact of qe has been variable i don ’ t think it would be right to pretend there ’ s some fixed, unchanging effect on the economy – to translate, for example, a given quantity of asset purchases ( or sales ) into some notional equivalent in terms of bank rate. it ’ s partly because of this, and the fact that we can only be less sure of its impact than that of conventional policy, that the mpc views bank rate is its “ primary ” policy instrument. by design, the committee did not embark on qt until the official interest rate reached a certain threshold – a level from which ( were the need to arise ) it could then be cut. it also said that, rather than responding to economic conditions – that is the task of the “ primary ” instrument – the path of the apf would be “ gradual and predictable ”. second, and because of this, it ’ s reasonable to suppose that this path is already reflected in the asset prices on which the mpc conditions its forecast. i ’ ve tried to argue today that the effects of qe and qt are transmitted predominantly via their impact on bond yields. the same goes for the expected path of the apf over the future : only surprises in qt decisions have an impact on these prices. so as long as there are no surprises – as long as the mpc always announces in advance its intentions, and the evolution of the balance sheet really is “ predictable ” – then the effects of qt will already be embodied in the yield curve. to add something else would be to double - count those effects. summary and conclusion no monetary policymaker should ignore information that ’ s relevant for future inflation. that includes the monetary aggregates. but like most economic data they need interpretation. certainly the very strongest claims – that qe inevitably leads to rapid growth of commercial bank deposits ( m4 ), on a par with that in the central bank ’ s balance sheet ; and that this, in turn, inevitably leads to excessive inflation – are not well supported by the evidence. broad money grew more than twice as rapidly in the first fifteen years of inflation targeting ( when there was no qe ) than in the