Why Central Banks no Longer Target Money Supply

link here to article

The Fed and other central banks target short term interest rates and the interest rate on bank reserves to conduct monetary policy. That is one of the reasons why I no longer teach traditional monetary policy that was developed in the 1950's. The traditional method of measuring money supply no longer applies in a world of debit cards, credit cards, and Pay Pal. Moreover, velocity has become so variable that the old equations based upon M1 and Velocity make little sense.

Another important point made in this article is directed at those who claim that the Fed has been printing money and that will lead to inflation. That claim is baseless. Banks create money when they make loans. The Fed has taken actions to bolster bank reserves and in the "old days" banks would have made loans with their reserves because interest was not paid on reserves. Since 2008 the Fed can pay interest rates on reserves and they do. Therefore, banks are keeping reserves at the Fed as a safe investment instead of making loans and creating money. Moreover, the bank reserves have been used by the Fed to purchase longer term assets that is another tool that has been seldom used before. Most critics of the Fed who claim that it is printing money do not understand modern monetary policy.