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Why Money Growth Determines Inflation in the Long Run: Answering the Woodford Critique


Woodford 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. Copyright (c) 2008 The Ohio State University.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 40 (2008)
Issue (Month): 8 (December)
Pages: 1791-1814

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Handle: RePEc:mcb:jmoncb:v:40:y:2008:i:8:p:1791-1814
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  1. Favara, Giovanni & Giordani, Paolo, 2002. "Reconsidering the Role of Money for Output, Prices and Interest Rates," SSE/EFI Working Paper Series in Economics and Finance 514, Stockholm School of Economics.
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  13. Bennett T. McCallum, 2001. "Monetary policy analysis in models without money," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 145-164.
  14. Edward Nelson & Anna J. Schwartz, 2008. "The impact of Milton Friedman on modern monetary economics: setting the record straight on Paul Krugman’s 'Who Was Milton Friedman?," Working Papers 2007-048, Federal Reserve Bank of St. Louis.
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  17. 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.
  18. Blinder, Alan S, 1987. "Keynes, Lucas, and Scientific Progress," American Economic Review, American Economic Association, vol. 77(2), pages 130-36, May.
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  20. Samuel Reynard, 2006. "Money and the Great Disinflation," Working Papers 2006-07, Swiss National Bank.
  21. 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.
  22. Friedman, Milton, 1972. "Comments on the Critics," Journal of Political Economy, University of Chicago Press, vol. 80(5), pages 906-50, Sept.-Oct.
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