Working Paper: NBER ID: w13325
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. 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 provides a compelling reason to assign a prominent role to monetary aggregates in the conduct of monetary policy.
Keywords: Monetary Policy; Inflation; Monetary Aggregates
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| neglecting the role of money (E49) | return to the inflationary policies of the 1970s (E65) |
| exclusion of money in models of inflation determination (E19) | incomplete models of inflation (E19) |
| money supply (E51) | inflation rates (E31) |
| short-run inflation forecasts (Phillips curve) (E31) | failure to account for monetary dynamics (E19) |