July 6th, 2004, 9:14 pm
Here's a guess: The growth rate was too large a percentage of the gross national product, such that errors in predicting the growth rate when setting the money supply, created large percentage errors in the money supply. Since the error in the money supply should be proportional to the error in production, which should be proportional to the change in production ((year 2 - year 1) / year 1 ). The money supply should approximate what is necessary to maintain the trade of goods at current prices. If the economic growth rate is 2%, then the errors in predicting the necessary money supply might be plus or minus 1%. If the growth rate is 20%, then the error in predicting the necessary money supply might be 10%. A 10% error in money supply can be magnified into a much larger price move. A higher economic growth rate results in a higher prediction error, and thus a larger error in monetary policy as a percentage of the money supply.It's always a safer bet to do something you did last year, then to try to do something new.