LONDON (MNI) – A key limitation on monetary policy stimulus is that
it can’t keep bringing forward spending, Bank of England Governor Mervyn
King says.

In evidence to the Treasury Select Committee King says that the
BOE’s asset purchases, its quantitative easing, have not in themselves
become less effective. He warns, however, that policymakers cannot keep
persuading businesses and consumers to bring forward spending when they
know they have to readjust spending in future.

“It’s not asset purchases as such that are less effective. We’re
still injecting more broad money into the economy, it’s that the ability
to persuade people to spend more today when they know that in the
long-run they will have to adjust to a new equilibrium,” King says.

In his evidence he reprised the whimsical line he used in a recent
speech about the problems of tomorrow becoming today.

“The purpose of monetary policy, in part, is to persuade people to
spend today what they otherwise might have spent tomorrow. You bring
spending from the future to today. The longer time goes on, tomorrow
turns into today and by now has become yesterday. This actually means
that you’ve got a hole to fill that you’ve created which you would hope
that you wouldn’t need to fill,” he said.

King argued that where QE has worked is in boosting money supply.

“I think everyone on the committee has taken the view that without
asset purchases then the increase in the money supply, the level of
demand and output would have a been a good deal weaker,” King said,

“In the absence of what we’ve done we would have expected a
contraction in broad money and that would have taken us into very
serious territory,” he added.

–London newsroom: 00 44 20 7862 7491;e-mail: wwilkes@marketnews.com
drobinson@marketnews.com
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