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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 (2007) 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.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2008-013.

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Date of creation: 2008
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Handle: RePEc:fip:fedlwp:2008-013

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Keywords: Monetary policy ; Macroeconomics;

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  1. Darryl R. Francis, 1973. "The usefulness of applied econometrics to the policymaker," Review, Federal Reserve Bank of St. Louis, issue May, pages 7-10.
  2. Michael Woodford, 2007. "How Important is Money in the Conduct of Monetary Policy?," NBER Working Papers 13325, National Bureau of Economic Research, Inc.
  3. Peter N. Ireland, 2005. "Changes in the Federal Reserve's inflation target: causes and consequences," Working Papers 05-13, Federal Reserve Bank of Boston.
  4. Eric M. Leeper & Jennifer E. Roush, 2003. "Putting "M" back in monetary policy," Proceedings, Federal Reserve Bank of Cleveland, pages 1217-1264.
  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. Nelson, Edward & Schwartz, Anna J., 2008. "The impact of Milton Friedman on modern monetary economics: Setting the record straight on Paul Krugman's "Who was Milton Friedman?"," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 835-856, May.
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  8. Blinder, Alan S, 1987. "Keynes, Lucas, and Scientific Progress," American Economic Review, American Economic Association, vol. 77(2), pages 130-36, May.
  9. 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.
  10. Samuel Reynard, 2007. "Maintaining Low Inflation: Money, Interest Rates, and Policy Stance," Working Papers 2007-05, Swiss National Bank.
  11. Bennett T. McCallum, 2001. "Monetary policy analysis in models without money," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 145-164.
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  13. Hahn, Frank, 1990. "On Inflation," Oxford Review of Economic Policy, Oxford University Press, vol. 6(4), pages 15-25, Winter.
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  15. De Fiore, Fiorella & Uhlig, Harald, 2005. "Bank finance versus bond finance: what explains the differences between US and Europe?," Working Paper Series 0547, European Central Bank.
  16. Favara, Giovanni & Giordani, Paolo, 2002. "Reconsidering the Role of Money for Output, Prices and Interest Rates," Working Paper Series in Economics and Finance 514, Stockholm School of Economics.
  17. Friedman, Milton, 1972. "Comments on the Critics," Journal of Political Economy, University of Chicago Press, vol. 80(5), pages 906-50, Sept.-Oct.
  18. Samuel Reynard, 2006. "Money and the Great Disinflation," Working Papers 2006-07, Swiss National Bank.
  19. Fernando Alvarez & Robert E. Lucas & Warren E. Weber, 2001. "Interest Rates and Inflation," American Economic Review, American Economic Association, vol. 91(2), pages 219-225, May.
  20. Nelson, Edward, 2003. "The Future of Monetary Aggregates in Monetary Policy Analysis," CEPR Discussion Papers 3897, C.E.P.R. Discussion Papers.
  21. 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.
  22. 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.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  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. Ahrens, Steffen & Snower, Dennis J., 2014. "Envy, guilt, and the Phillips curve," Journal of Economic Behavior & Organization, Elsevier, vol. 99(C), pages 69-84.
  2. 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.
  3. Benchimol, Jonathan & Fourçans, André, 2009. "Money in a DSGE framework with an application to the Euro Zone," ESSEC Working Papers DR 09005, ESSEC Research Center, ESSEC Business School.
  4. Schreiber, Sven, 2013. "(When) does money growth help to predict Euro-area inflation at low frequencies?," Discussion Papers 2013/10, Free University Berlin, School of Business & Economics.
  5. Hiona Balfoussia & Sophocles N. Brissimis & Manthos D. Delis, 2011. "The theoretical framework of monetary policy revisited," Working Papers 138, Bank of Greece.
  6. Nakashima, Kiyotaka & Saito, Makoto, 2012. "On the comparison of alternative specifications for money demand: The case of extremely low interest rate regimes in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 26(3), pages 454-471.
  7. 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.
  8. Barthélemy, J. & Clerc L. & Marx, M., 2008. "A Two-Pillar DSGE Monetary Policy Model for the Euro Area," Working papers 219, Banque de France.
  9. Michael T. Belongia & Peter N. Ireland, 2013. "Instability: Monetary and Real," Boston College Working Papers in Economics 830, Boston College Department of Economics.
  10. Wei-Bin Zhang, 2013. "Education, Endogenous Human Capital, and Monetary Economic Growth with MIU Approach," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 7(2), pages 100-118, July.
  11. 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.
  12. Cysne, Rubens Penha & Turchick, David, 2010. "Money supply and capital accumulation on the transition path revisited," Economics Working Papers (Ensaios Economicos da EPGE) 702, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).

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