How Important is Money in the Conduct of Monetary Policy?

55 Pages Posted: 22 May 2008

See all articles by Michael Woodford

Michael Woodford

Columbia University, Graduate School of Arts and Sciences, Department of Economics

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Date Written: March 2007

Abstract

I consider some of the leading arguments for assigning an important role to tracking the growth of monetary aggregates when making decisions about monetary policy. First, I consider whether ignoring money means returning to the conceptual framework that allowed the high inflation of the 1970s. Second, I consider whether models of inflation determination with no role for money are incomplete, or inconsistent with elementary economic principles. Third, I consider the implications for monetary policy strategy of the empirical evidence for a long-run relationship between money growth and inflation. (Here I give particular attention to the implications of "two-pillar Phillips curves" of the kind proposed by Gerlach (2004).) And fourth, I consider reasons why a monetary policy strategy based solely on short-run inflation forecasts derived from a Phillips curve may not be a reliable way of controlling inflation. I argue that none of these considerations provide a compelling reason to assign a prominent role to monetary aggregates in the conduct of monetary policy.

Keywords: Monetarism, monetary targeting, new Keynesian model, two-pillar strategy

JEL Classification: E52, E58

Suggested Citation

Woodford, Michael, How Important is Money in the Conduct of Monetary Policy? (March 2007). CEPR Discussion Paper No. DP6211, Available at SSRN: https://ssrn.com/abstract=1135453

Michael Woodford (Contact Author)

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

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New York, NY 10027
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