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How Important is Money in the Conduct of Monetary Policy?

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Author Info
Michael Woodford

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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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13325.

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Date of creation: Aug 2007
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Handle: RePEc:nbr:nberwo:13325

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Carlos Esteban Posada & Camilo Morales J., . "La inflación y la política monetaria colombianas del período 1996-2006: una interpretación," Borradores de Economia 465, Banco de la Republica de Colombia. [Downloadable!]
    Other versions:
  2. Woodford, Michael, 2007. "Does a 'Two-Pillar Phillips Curve' Justify a Two-Pillar Monetary Policy Strategy?," CEPR Discussion Papers 6447, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Javier Andrés & J. David López-Salido & Edward Nelson, 2007. "Money and the natural rate of interest: structural estimates for the United States and the Euro area," Working Papers 2007-005, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
  4. Jordi Galí & Mark Gertler, 2007. "Macroeconomic Modeling for Monetary Policy Evaluation," NBER Working Papers 13542, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Kai Carstensen, 2007. "Is core money growth a good and stable inflation predictor in the euro area?," Kiel Working Papers 1318, Kiel Institute for the World Economy. [Downloadable!]
  6. Jose De Gregorio, 2007. "Defining Inflation Targets, the Policy Horizon and the Output-Inflation Tradeoff," Working Papers Central Bank of Chile 415, Central Bank of Chile. [Downloadable!]
  7. Edward Nelson, 2008. "Why money growth determines inflation in the long run: answering the Woodford critique," Working Papers 2008-013, Federal Reserve Bank of St. Louis. [Downloadable!]
  8. 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. [Downloadable!] (restricted)
    Other versions:
  9. Argov, Eyal & Elkayam, David, 2007. "An Estimated New Keynesian Model for Israel," MPRA Paper 9412, University Library of Munich, Germany. [Downloadable!]
  10. Daniel L. Thornton, 2008. "Monetary policy: why money matters and interest rates don't," Working Papers 2008-011, Federal Reserve Bank of St. Louis. [Downloadable!]
  11. Berger, Helge & Österholm, Pär, 2007. "Does Money Growth Granger-Cause Inflation in the Euro Area? Evidence from Out-of-Sample Forecasts Using Bayesian VARs," Working Paper Series 2007:30, Uppsala University, Department of Economics. [Downloadable!]
    Other versions:
  12. Argov, Eyal & Binyamini, Alon & Elkayam, David & Rozenshtrom, Irit, 2007. "A Small Macroeconomic Model to Support Inflation Targeting in Israel," MPRA Paper 4784, University Library of Munich, Germany. [Downloadable!]
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