In a groundbreaking study for the Institute of Economic Affairs, leading economist Tim Congdon argues that movements in the general level of asset prices (such as house prices and equity markets) are strongly influenced by the behaviour of the money supply. Commenting on the release of Money and Asset Prices in Boom and Bust, Congdon said, With the annual rate of money supply growth in the UK again running in double digits, these findings are very relevant for the current debate on interest rates.
Congdon bases his conclusions on analyses of three episodes in the UK, including the two notorious boom-bust cycles of the early 1970s and late 1980s, as well as the Great Depression in the USA between 1929 and 1993, and the prolonged malaise in the Japanese economy since the early 1990s. The study shows that the level of monetary growth is a key influence on asset price movements. These, in turn, have a powerful effect on incomes and expenditure and inflation.
It is currently fashionable to downplay the relationship between money and inflation and focus on the role that interest rates play in monetary policy. Congdon shows that this is misguided. Congdon also believes that it is misguided to focus on narrow money when setting monetary policy. It is difficult to believe that M0 (narrow money) could ever have been