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Multiple Critiques of Woodford’s Model of a Cashless Economy

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  • David Eagle

    (Eastern Washington University)

Abstract

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.

Suggested Citation

  • David Eagle, 2005. "Multiple Critiques of Woodford’s Model of a Cashless Economy," Macroeconomics 0504028, EconWPA.
  • Handle: RePEc:wpa:wuwpma:0504028
    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.
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    File URL: http://econwpa.repec.org/eps/mac/papers/0504/0504028.pdf
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    References listed on IDEAS

    as
    1. David Eagle & Elizabeth Murff, 2005. "Logical Pitfalls of Assuming Bounded Solutions to Expectational Difference Equations," GE, Growth, Math methods 0501002, EconWPA.
    2. David Eagle, 2005. "Completing Markets in a One-Good, Pure Exchange Economy Without State-Contingent Securities," Finance 0501009, EconWPA.
    3. David Eagle, 2005. "Price Indeterminacy Reinvented: Pegging Interest Rates While Targeting Prices, Inflation, or Nominal Income," Macroeconomics 0501028, EconWPA.
    4. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    cashless economy; monetary economics; pegging interest rates; central banking;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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