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Doing Without Money: Controlling Inflation in a Post-Monetary World

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  • Michael Woodford

    (Department of Economics, Princeton University)

Abstract

This paper shows that it is possible to analyze equilibrium inflation determination without any reference to either money supply or demand, as long as one specifies policy in terms of a "Wicksellian" interest-rate feedback rule. The paper's central result is an approximation theorem, showing the existence, for a simple monetary model, of a well-behaved "cashless limit" in which the money balances held to facilitate transactions become negligible. Inflation in the cashless limit is shown to be a function of the gap between the "natural rate" of interest, determined by the supply of goods and opportunities for intertemporal substitution, and a time-varying parameter of the interest-rate rule indicating the tightness of monetary policy. Inflation can be completely stabilized, in principle, by adjusting the policy parameter to track variation in the natural rate. Under such a regime, instability of money demand has little effect upon equilibrium inflation and need not be monitored by the central bank. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1006/redy.1997.0006
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 1 (1998)
Issue (Month): 1 (January)
Pages: 173-219

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Handle: RePEc:red:issued:v:1:y:1998:i:1:p:173-219

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References

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  1. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," NBER Working Papers 5893, National Bureau of Economic Research, Inc.
  2. Lars E. O. Svensson, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," NBER Working Papers 5797, National Bureau of Economic Research, Inc.
  3. Robert E. Lucas, Jr. & Nancy L. Stokey, 1985. "Money and Interest in a Cash-in-Advance Economy," NBER Working Papers 1618, National Bureau of Economic Research, Inc.
  4. Schmitt-Grohe, Stephanie & Uribe, Martin, 2000. "Price level determinacy and monetary policy under a balanced-budget requirement," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 211-246, February.
  5. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
  6. Obstfeld, Maurice & Rogoff, Kenneth, 1983. "Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out?," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 675-87, August.
  7. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
  8. Robert E. Hall & N. Gregory Mankiw, 1994. "Nominal Income Targeting," NBER Chapters, in: Monetary Policy, pages 71-94 National Bureau of Economic Research, Inc.
  9. Estrella, Arturo & Mishkin, Frederic S., 1997. "Is there a role for monetary aggregates in the conduct of monetary policy?," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 279-304, October.
  10. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, vol. 4(3), pages 345-80.
  11. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
  12. Benjamin M. Friedman & Kenneth N. Kuttner, 1996. "A price target for U.S. monetary policy? Lessons from the experience with money growth targets," Working Paper Series, Macroeconomic Issues WP-96-14, Federal Reserve Bank of Chicago.
  13. Mankiw, N. Gregory (ed.), 1997. "Monetary Policy," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226503097.
  14. Obstfeld, Maurice & Rogoff, Kenneth S., 1983. "Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out?," Scholarly Articles 12491027, Harvard University Department of Economics.
  15. Brock, William A., 1975. "A simple perfect foresight monetary model," Journal of Monetary Economics, Elsevier, vol. 1(2), pages 133-150, April.
  16. Fuhrer, Jeffrey C & Moore, George R, 1995. "Forward-Looking Behavior and the Stability of a Conventional Monetary Policy Rule," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1060-70, November.
  17. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer, vol. 4(3), pages 381-99.
  18. Ben S. Bernanke & Michael Woodford, 1997. "Inflation Forecasts and Monetary Policy," NBER Working Papers 6157, National Bureau of Economic Research, Inc.
  19. Bennett T. McCallum & Edward Nelson, 1997. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," NBER Working Papers 5875, National Bureau of Economic Research, Inc.
  20. Manuel S. Santos & Michael Woodford, 1993. "Rational Asset Pricing Bubbles," Working Papers 9304, Centro de Investigacion Economica, ITAM.
  21. Sumner, Scott, 1995. "The Impact of Futures Price Targeting on the Precision and Credibility of Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 89-106, February.
  22. Mervyn King, 1994. "Monetary policy in the UK," Fiscal Studies, Institute for Fiscal Studies, vol. 15(3), pages 109-28, August.
  23. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  24. Woodford, Michael, 1995. "Price-level determinacy without control of a monetary aggregate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 1-46, December.
  25. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
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