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Principled Policymaking in an Uncertain World

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  • Michael Woodford

Abstract

A crucial legacy of Phelps et al (1970) has been recognition of the importance of economic agents' anticipations as a determinant of macroeconomic outcomes. This has had many profound consequences for macroeconomic analysis. Among them is the fact that the subsequent theoretical literature on monetary policy has focused on the analysis of monetary policy rules, rather than on decisions about individual policy actions. The present essay considers the reasons for this development, and the extent to which such a focus continues to be appropriate in the light of subsequent events -- changes in central banks' approach to monetary policy in the decades since the publication of the Phelps volume, and even more crucially the reconsideration of macroeconomic theory and policy that is necessary in the wake of the global financial crisis.

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Paper provided by Institute for New Economic Thinking (INET) in its series INET Research Notes with number 10.

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Date of creation: 15 Jul 2012
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Handle: RePEc:thk:rnotes:10

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  1. Svensson, Lars E. O., 1998. "Inflation targeting as a monetary policy rule," CFS Working Paper Series 1998/16, Center for Financial Studies (CFS).
  2. Svensson, Lars E. O., 2005. "Monetary policy with judgment: forecast targeting," Working Paper Series 0476, European Central Bank.
  3. Evans, George W & Honkapohja, Seppo, 2001. "Expectations and the Stability Problem for Optimal Monetary Policies," CEPR Discussion Papers 2805, C.E.P.R. Discussion Papers.
  4. Lars E.O. Svensson, 2002. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Working Papers 118, Princeton University, Department of Economics, Center for Economic Policy Studies..
  5. Marc P. Giannoni & Michael Woodford, 2012. "Optimal target criteria for stabilization policy," Staff Reports 535, Federal Reserve Bank of New York.
  6. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  7. Roger Guesnerie, 2005. "Assessing Rational Expectations 2: "Eductive" Stability in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262072580, January.
  8. Pearce, David G, 1984. "Rationalizable Strategic Behavior and the Problem of Perfection," Econometrica, Econometric Society, vol. 52(4), pages 1029-50, July.
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