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Monetary Policy and its Theoretical Foundations

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Abstract

This paper briefly discusses why a monetary policy framework that emphasises interest rates has become standard in recent years, and why so many economists have been persuaded simultaneously to downgrade the importance of monetary aggregates. Then it describes Michael Woodford's particular contribution to these developments, and contrasts it with a more traditional approach to the theory of money that stresses its means of exchange role. It suggests that, though there are difficulties aplenty with the latter, Woodford's cashless simplification of the monetary economy presents problems of its own, both for monetary theory per se, and for the discussion of currently relevant monetary policy questions. It concludes that the theoretical basis for monetary policy should embrace wary eclecticism.

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File URL: http://economics.uwo.ca/epri/workingpapers_docs/wp2005/Laidler_08.pdf
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Bibliographic Info

Paper provided by University of Western Ontario, Economic Policy Research Institute in its series University of Western Ontario, Economic Policy Research Institute Working Papers with number 20058.

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Date of creation: 2005
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Handle: RePEc:uwo:epuwoc:20058

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Postal: Economic Policy Research Institute, Social Science Centre, University of Western Ontario, London, Ontario, Canada N6A 5C2
Phone: 519-661-2111 Ext.85244
Web page: http://economics.uwo.ca/research/research_papers/epri_workingpapers.html

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Keywords: money; interest rates; inflation; monetarism; cashless economy; open-market operations rates; unemployment; multiplier;

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