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Mr. Woodford and the Challenge of Finance

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  • Mehrling, Perry

Abstract

Once one recognizes that many prices (and wages) are fairly sticky over short time intervals, the arbitrariness of the path of nominal prices (in the sense of their under-determination by real factors alone) implies that the path of real activity and the associated path of equilibrium real interest rates are equally arbitrary. It is equally possible, from a logical standpoint, to imagine allowing the central bank to determine, by arbitrary fiat, the path of aggregate real activity, or the path of real interest rates, as it is to imagine allowing it to determine the path of nominal interest rates. In practice, it is easiest for central banks to exert relatively direct control over overnight nominal interest rates, and so they generally formulate their short-run objectives (their operating target) in terms of the effect that they seek to bring about in this variable rather than in one of the others.

Suggested Citation

  • Mehrling, Perry, 2006. "Mr. Woodford and the Challenge of Finance," Journal of the History of Economic Thought, Cambridge University Press, vol. 28(2), pages 161-170, June.
    • Handle: RePEc:cup:jhisec:v:28:y:2006:i:02:p:161-170_00
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    Cited by:

    1. Ceri Davies & Max Gillman & Michal Kejak, 2012. "Deriving the Taylor Principle when the Central Bank Supplies Money," CERS-IE WORKING PAPERS 1225, Institute of Economics, Centre for Economic and Regional Studies.
    2. Pedro Garcia Duarte, 2012. "Not Going Away? Microfoundations in the Making of a New Consensus in Macroeconomics," Chapters, in: Microfoundations Reconsidered, chapter 6, Edward Elgar Publishing.
    3. Pedro Garcia Duarte & Gilberto Tadeu Lima, 2012. "Microfoundations Reconsidered," Books, Edward Elgar Publishing, number 14869.

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