what is an appropriate rate of growth for M2 and M3 ? Nominal GDP growth rate? Chinese M2 is growing at 17% US and Eurozone M2 are growing at faster pace than GDP as well. Nobody cares in the central bankers community.
whats wrong with not growing the money supply at all and just replacing the worn out notes? deflation ain't bad if everything deflates at the same ratio
you need to distinguish between a normal deflation that comes from population and gdp growth that is higher than the money supply growth and a deflation that is the results of bank runs, low confidence in the economy and financial crisis
One could argue that some inflation is needed to make the labor market more flexible. Nominal wage cuts are not easily accepted by most workers, when some inflation is the norm real wage cuts are possible in a sector or company with low profitability by keeping the nominal wages steady. But maybe this is just a justification for giving power to central planners.
Paul Kasriel, the excellent economist of Northern Trust, thinks the appropriate rate of money growth in a central banking system equals population growth. Of course not. They are liars just like the politicians they serve. Central bankers only prentend to care about inflation, but really only care about how to inflate as much as they can get away with. Which is why we should get rid of central banks altogether. Also, let's get the true definition of inflation straight. It is NOT the CPI, PCE, or any other manipulated measure of consumer prices. Inflation = growth of the money supply. And money supply has grown about 9% recently in the US. Barry Ritholtz pointed out the accelerating M3 in his blog: http://bigpicture.typepad.com/comments/2006/11/the_return_of_m.html
I'm not sure this is all appropriate. If the printed money stays at some illiquid part of the financial sector it wont be used to bid up prices and produce price instability, therefore even though its 'inflation' its not producing economic problems. this definition doesnt make this distinction and assumes all the new money is bad
The only way money can stay in "some illiquid part of the financial sector" is if someone wants to hoard more and more cash. Perhaps the drug business and the rest of the underground economy is growing all the time, but I doubt that they are keeping any significant fraction of the growth of the money supply in ever-growing cash reserves.
if there is one currency where cash reserves(specially worldwide) are significant is the world reserve currency plus within financial instruments you have high variability of liquidity