Working Paper: CEPR ID: DP6211
Authors: Michael Woodford
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 Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| money growth (O42) | inflation rates (E31) |
| neglect of monetary aggregates (E19) | high inflation (E31) |
| inclusion of money in models (E19) | accuracy of inflation predictions (E31) |
| short-run inflation forecasts from Phillips curves (E31) | effective inflation control (E31) |