Multiple Critiques of Woodford’s Model of a Cashless Economy
Woodford’s (2003) model of a cashless economy is the basis for his book Interest and Prices. Since Woodford assumes complete markets, this paper explicitly includes state-contingent securities with either temporary money or a cash-in-advance constraint to analyze Woodford’s logic. This analysis finds four logical problems with Woodford’s analysis: (1) Woodford’s assumption that his solution is bounded is inappropriate. (2) Any finite version of Woodford’s model is incomplete. (3) Woodford’s central bank does not control nominal interest rates. (4) Woodford argument that interest rates determine prices and that prices affect the interest rate is circular and hence invalid.
|Date of creation:||19 Apr 2005|
|Date of revision:|
|Note:||Type of Document - pdf; pages: 30. I did try to submit many of the points made in the paper directly to Woodford initially. However, he never responded.|
|Contact details of provider:|| Web page: http://econwpa.repec.org|
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- Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
- David Eagle, 2005. "Completing Markets in a One-Good, Pure Exchange Economy Without State-Contingent Securities," Finance 0501009, EconWPA.
- David Eagle, 2005. "Price Indeterminacy Reinvented: Pegging Interest Rates While Targeting Prices, Inflation, or Nominal Income," Macroeconomics 0501028, EconWPA.
- David Eagle & Elizabeth Murff, 2005. "Logical Pitfalls of Assuming Bounded Solutions to Expectational Difference Equations," GE, Growth, Math methods 0501002, EconWPA.
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