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Why money growth determines inflation in the long run: answering the Woodford critique

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  • Edward Nelson

Abstract

Woodford (2007) 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.

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  • Edward Nelson, 2008. "Why money growth determines inflation in the long run: answering the Woodford critique," Working Papers 2008-013, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2008-013
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    Keywords

    Monetary policy ; Macroeconomics;

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