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Money as Friction: Conceptual Dissonance in Woodford's Interest and Prices

Author

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  • Colin Rogers

    () (School of Economics, University of Adelaide)

Abstract

In Interest and Prices Woodford employs a frictionless model to derive nominal interest rate rules that can be applied by central banks to achieve price level stability. But frictionless models are Walrasian general equilibrium models that preclude any role for money. Furthermore frictionless model have no role for nominal values or the price level and therefore no role for a central bank. Consequently, conceptual anomalies arise in Woodford's attempt to analyse questions of monetary theory and policy that are precluded by construction in frictionless models. In some states of the model money is converted into a 'friction', contra economic theory.

Suggested Citation

  • Colin Rogers, 2008. "Money as Friction: Conceptual Dissonance in Woodford's Interest and Prices," School of Economics Working Papers 2008-03, University of Adelaide, School of Economics.
  • Handle: RePEc:adl:wpaper:2008-03
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    File URL: http://www.economics.adelaide.edu.au/research/papers/doc/wp2008-03.pdf
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    Keywords

    frictionless models; time-0 auction; 'monetary frictions';

    JEL classification:

    • B40 - Schools of Economic Thought and Methodology - - Economic Methodology - - - General
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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