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Why Money Growth Determines Inflation in the Long Run: Answering the Woodford Critique

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  • EDWARD NELSON

Abstract

Woodford argues that it is not appropriate to regard inflation in the steady state of New Keynesian models as determined by steady-state money growth. Woodford instead argues that the intercept term in the monetary authority's interest rate policy rule determines steady-state inflation. In this paper, I offer an alternative interpretation of steady-state behavior, according to which it is appropriate to regard steady-state inflation as determined by steady-state money growth. The argument relies on traditional interpretations of the central bank's power in the long run and appeals to model properties that are common to textbook and New Keynesian analysis. According to this argument, the only way the central bank can control interest rates in the long run is via affecting inflation, and its only means available for determining inflation is by determining the money growth rate. Copyright (c) 2008 The Ohio State University.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 40 (2008)
Issue (Month): 8 (December)
Pages: 1791-1814

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Handle: RePEc:mcb:jmoncb:v:40:y:2008:i:8:p:1791-1814

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Samuel Reynard, 2006. "Money and the Great Disinflation," Working Papers 2006-07, Swiss National Bank.
  2. Reynard, Samuel, 2007. "Maintaining low inflation: Money, interest rates, and policy stance," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1441-1471, July.
  3. McCallum, Bennett T., 1990. "Inflation: Theory and evidence," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 18, pages 963-1012 Elsevier.
  4. Peter N. Ireland, 2005. "Changes in the Federal Reserve’s Inflation Target: Causes and Consequences," Boston College Working Papers in Economics 607, Boston College Department of Economics.
  5. Nelson, Edward, 2007. "Comment on: Samuel Reynard, "Maintaining low inflation: Money, interest rates, and policy stance"," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1472-1479, July.
  6. Bennett T. McCallum, 2001. "Monetary Policy Analysis in Models Without Money," NBER Working Papers 8174, National Bureau of Economic Research, Inc.
  7. Fernando Alvarez & Robert E. Lucas, Jr. & Warren E. Weber, 2001. "Interest rates and inflation," Working Papers 609, Federal Reserve Bank of Minneapolis.
  8. Michael Woodford, 2007. "How Important is Money in the Conduct of Monetary Policy?," NBER Working Papers 13325, National Bureau of Economic Research, Inc.
  9. Edward Nelson & Anna J. Schwartz, 2007. "The Impact of Milton Friedman on Modern Monetary Economics: Setting the Record Straight on Paul Krugman's "Who Was Milton Friedman?"," NBER Working Papers 13546, National Bureau of Economic Research, Inc.
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  11. Nelson, Edward, 2003. "The Future of Monetary Aggregates in Monetary Policy Analysis," CEPR Discussion Papers 3897, C.E.P.R. Discussion Papers.
  12. Fiorella De Fiore & Harald Uhlig, 2005. "Bank finance versus bond finance: what explains the differences between US and Europe?," SFB 649 Discussion Papers SFB649DP2005-042, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  13. Eric M. Leeper & Jennifer E. Roush, 2003. "Putting "M" back in monetary policy," Proceedings, Federal Reserve Bank of Cleveland, pages 1217-1264.
  14. Friedman, Milton, 1972. "Comments on the Critics," Journal of Political Economy, University of Chicago Press, vol. 80(5), pages 906-50, Sept.-Oct.
  15. Favara, Giovanni & Giordani, Paolo, 2009. "Reconsidering the role of money for output, prices and interest rates," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 419-430, April.
  16. James Tobin & Willem H. Buiter, 1974. "Long Run Effects of Fiscal and Monetary Policy on Aggregate Demand," Cowles Foundation Discussion Papers 384, Cowles Foundation for Research in Economics, Yale University.
  17. Bernanke, Ben S & Woodford, Michael, 1997. "Inflation Forecasts and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 653-84, November.
  18. Hahn, Frank, 1990. "On Inflation," Oxford Review of Economic Policy, Oxford University Press, vol. 6(4), pages 15-25, Winter.
  19. Darryl R. Francis, 1973. "The usefulness of applied econometrics to the policymaker," Review, Federal Reserve Bank of St. Louis, issue May, pages 7-10.
  20. Blinder, Alan S, 1987. "Keynes, Lucas, and Scientific Progress," American Economic Review, American Economic Association, vol. 77(2), pages 130-36, May.
  21. Lawrence Christiano & Roberto Motto & Massimo Rostagno, 2007. "Two Reasons Why Money and Credit May be Useful in Monetary Policy," NBER Working Papers 13502, National Bureau of Economic Research, Inc.
  22. Blinder, Alan S. & Solow, Robert M., 1973. "Does fiscal policy matter?," Journal of Public Economics, Elsevier, vol. 2(4), pages 319-337.
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Blog mentions

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  1. What Monetarism Really Wasnâ??t
    by Josh in The everyday economist on 2011-05-05 03:51:07
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Cited by:
  1. Barthélemy, Jean & Clerc, Laurent & Marx, Magali, 2011. "A two-pillar DSGE monetary policy model for the euro area," Economic Modelling, Elsevier, vol. 28(3), pages 1303-1316, May.
  2. Hiona Balfoussia & Sophocles N. Brissimis & Manthos D. Delis, 2011. "The theoretical framework of monetary policy revisited," Working Papers 138, Bank of Greece.
  3. Cysne, Rubens Penha & Turchick, David, 2010. "Money supply and capital accumulation on the transition path revisited," Economics Working Papers (Ensaios Economicos da EPGE) 702, Graduate School of Economics, Getulio Vargas Foundation (Brazil).
  4. Lothian, James R. & McCarthy, Cornelia H., 2009. "The behavior of money and other economic variables: Two natural experiments," Journal of International Money and Finance, Elsevier, vol. 28(7), pages 1204-1220, November.
  5. Michael Bleaney & Sharmila Devadas, 2013. "Foreign Exchange Inflows in Emerging Markets: How Much Are They Sterilised?," Discussion Papers 13/01, University of Nottingham, School of Economics.
  6. Fourçans, André & Vranceanu, Radu, 2008. "Money in the Inflation Equation: the Euro Area Evidence," ESSEC Working Papers DR 08012, ESSEC Research Center, ESSEC Business School.

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