Working Paper: NBER ID: w8674
Authors: Michael Woodford
Abstract: This paper considers two challenges that improvements in private-sector information-processing capabilities may pose for the effectiveness of monetary policy. It first considers the consequences of improved information about central-bank actions, and argues that the management of expectations will become even more important to effective monetary policy. The paper next considers the consequences of the potential erosion of private-sector demand for central-bank money. This should not fundamentally impair the ability of central banks to achieve their stabilization objectives, though it may require a new approach to the implementation of monetary policy. The advantages of a 'channel' system, in which central-bank standing facilities are the main tool used to control overnight interest rates, are discussed.
Keywords: Monetary Policy; Information Economy
JEL Codes: E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Improved information dissemination (D83) | Reduced ability of central banks to surprise the markets (E52) |
| Reduced ability of central banks to surprise the markets (E52) | Increased effectiveness of monetary policy (E52) |
| Improved information dissemination (D83) | Increased effectiveness of monetary policy (E52) |
| Financial innovations (G29) | Reduced demand for central bank money (E49) |
| Reduced demand for central bank money (E49) | Undermined central bank's leverage over the economy (E58) |
| Financial innovations (G29) | Undermined central bank's leverage over the economy (E58) |