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How Important is Money in the Conduct of Monetary Policy?

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  • Michael Woodford

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    (Columbia University - Department of Economics)

Abstract

I consider some of the leading arguments for assigning an important role to tracking the growth of monetary aggregates when making decisions about monetary policy. First, I consider whether ignoring money means returning to the conceptual framework that allowed the high inflation of the 1970s. Second, I consider whether models of inflation determination with no role for money are incomplete, or inconsistent with elementary economic principles. Third, I consider the implications for monetary policy strategy of the empirical evidence for a long-run relationship between money growth and inflation. And fourth, I consider reasons why a monetary policy strategy based solely on short-run inflation forecasts derived from a Phillips curve may not be a reliable way of controlling inflation. I argue that none of these considerations provides a compelling reason to assign a prominent role to monetary aggregates in the conduct of monetary policy.

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Paper provided by Columbia University, Department of Economics in its series Discussion Papers with number 0607-16.

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Date of creation: 2007
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Handle: RePEc:clu:wpaper:0607-16

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