ABSTRACT
Chapter 1 of this book has described how central banks around the world have been given clear mandates to devote monetary policy to the principal (and sometimes single) goal of maintaining stable prices. This has successfully restricted the ability of governments to initiate inflation for their own purposes - economic or political - but this books argues that there may be other costs in controlling inflation through monetary policy alone if excess monetary growth is initiated by the private sector rather than by the government. In particular, previous chapters have developed a model in which the private sector is able to create an excess money stock by adopting a long-run marginal debt-capital ratio in excess of the economy's aggregate money-wealth ratio. Hence, ifthe central bank is to maintain price stability, its policies must seek to control the money stock indirectly, by influencing the funding decisions of investing firms. The main purpose of this chapter is to analyse how this is done, and then to consider whether supplementary policies are available that would allow price stability to be achieved at a lower cost to economic growth.
