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Interest and Prices : Foundations of a Theory of Monetary Policy - Michael Woodford

Interest and Prices

Foundations of a Theory of Monetary Policy

Hardcover Published: 7th September 2003
ISBN: 9780691010496
Number Of Pages: 808

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With the collapse of the Bretton Woods system, any pretense of a connection of the world's currencies to any real commodity has been abandoned. Yet since the 1980s, most central banks have abandoned money-growth targets as practical guidelines for monetary policy as well. How then can pure "fiat" currencies be managed so as to create confidence in the stability of national units of account?

"Interest and Price"s seeks to provide theoretical foundations for a rule-based approach to monetary policy suitable for a world of instant communications and ever more efficient financial markets. In such a world, effective monetary policy requires that central banks construct a conscious and articulate account of what they are doing. Michael Woodford reexamines the foundations of monetary economics, and shows how interest-rate policy can be used to achieve an inflation target in the absence of either commodity backing or control of a monetary aggregate.

The book further shows how the tools of modern macroeconomic theory can be used to design an optimal inflation-targeting regime--one that balances stabilization goals with the pursuit of price stability in a way that is grounded in an explicit welfare analysis, and that takes account of the "New Classical" critique of traditional policy evaluation exercises. It thus argues that rule-based policymaking need not mean adherence to a rigid framework unrelated to stabilization objectives for the sake of credibility, while at the same time showing the advantages of rule-based over purely discretionary policymaking.

Winner of the 2003 Award for Best Professional/Scholarly Book in Economics, Association of American Publishers

Prefacep. xiii
The Return of Monetary Rulesp. 1
The Importance of Price Stabilityp. 4
Toward a New "Neoclassical Synthesis"p. 6
Microeconomic Foundations and Policy Analysisp. 10
The Importance of Policy Commitmentp. 14
Central Banking as Management of Expectationsp. 15
Pitfalls of Conventional Optimal Controlp. 18
Monetary Policy without Control of a Monetary Aggregatep. 24
Implementing Interest-Rate Policyp. 25
Monetary Policy in a Cashless Economyp. 31
Interest-Rate Rulesp. 37
Contemporary Proposalsp. 39
General Criticisms of Interest-Rate Rulesp. 44
Neo-Wicksellian Monetary Theoryp. 49
Plan of the Bookp. 55
Analytical Framework
Price-Level Determination under Interest-Rate Rulesp. 61
Price-Level Determination in a Cashless Economyp. 62
An Asset-Pricing Model with Nominal Assetsp. 64
A Wicksellian Policy Regimep. 74
Alternative Interest-Rate Rulesp. 85
Exogenous Interest-Rate Targetsp. 86
The Taylor Principle and Determinacyp. 90
Inertial Responses to Inflation Variationp. 94
Price-Level Determination with Monetary Frictionsp. 101
A Model with Transactions Frictionsp. 102
Interest-Rate Rules Reconsideredp. 105
A Comparison with Money-Growth Targetingp. 106
Consequences of Nonseparable Utilityp. 111
Self-Fulfilling Inflations and Deflationsp. 123
Global Multiplicity Despite Local Determinacyp. 123
Policies to Prevent a Deflationary Trapp. 131
Policies to Prevent an Inflationary Panicp. 135
Optimizing Models with Nominal Rigiditiesp. 139
A Basic Sticky-Price Modelp. 143
Pricesetting and Endogenous Outputp. 143
Consequences of Prices Fixed in Advancep. 155
A New Classical Phillips Curvep. 158
Sources of Strategic Complementarityp. 163
Inflation Dynamics with Staggered Pricesettingp. 173
The Calvo Model of Pricesettingp. 177
A New Keynesian Phillips Curvep. 187
Persistent Real Effects of Nominal Disturbancesp. 188
Consequences of Persistence in the Growth of Nominal Spendingp. 197
Consequences of Sectoral Asymmetriesp. 200
Delayed Effects of Nominal Disturbances on Inflationp. 204
Staggered Pricing with Delayed Price Changesp. 207
Consequences of Indexation to Past Inflationp. 213
Consequences of Nominal Wage Stickinessp. 218
A Model of Staggered Wagesettingp. 221
Sticky Wages and the Real Effects of Nominal Disturbancesp. 226
A Neo-Wicksellian Framework for the Analysis of Monetary Policyp. 237
A Basic Modelof the Effects of Monetary Policyp. 238
Nonlinear Equilibrium Conditionsp. 239
A Log-Linear Approximate Modelp. 243
Interest-Rate Rules and Price Stabilityp. 247
The Natural Rate of Interestp. 247
Conditions for Determinacy of Equilibriump. 252
Stability under Learning Dynamicsp. 261
Determinants of Inflationp. 276
Inflation Stabilization through Commitment to a Taylor Rulep. 286
Inflation Targeting Rulesp. 290
Money and Aggregate Demandp. 295
An Optimizing IS-LM Modelp. 295
Real-Balance Effectsp. 299
Fiscal Requirements for Price Stabilityp. 311
Dynamics of the Response to Monetary Policyp. 320
Delayed Effects of Monetary Policyp. 321
Consequences of Predetermined Expenditurep. 322
Habit Persistence in Private Expenditurep. 332
Some Small Quantitative Modelsp. 336
The Rotemberg-Woodford Modelp. 336
More Complex Variantsp. 345
Monetary Policy and Investment Dynamicsp. 352
Investment Demand with Sticky Pricesp. 353
Optimal Pricesetting with Endogenous Capitalp. 357
Comparison with the Basic Neo-Wicksellian Modelp. 361
Capital and the Natural Rate of Interestp. 372
Optimal Policy
Inflation Stabilization and Welfarep. 381
Approximation of Loss Functions and Optimal Policiesp. 383
A Utility-Based Welfare Criterionp. 392
Output-Gap Stability and Welfarep. 393
Inflation and Relative-Price Distortionsp. 396
The Case for Price Stabilityp. 405
The Case of an Efficient Natural Rate of Outputp. 407
Consequences of a Mildly InEfficient Natural Rate of Outputp. 411
Caveatsp. 416
Extensions of the Basic Analysisp. 419
Transactions Frictionsp. 420
The Zero Interest-Rate Lower Boundp. 427
Asymmetric Disturbancesp. 435
Sticky Wages and Pricesp. 443
Time-Varying Tax Wedges or Markupsp. 448
The Case of Larger Distortionsp. 455
Gains from Commitment to a Policy Rulep. 464
The Optimal Long-Run Inflation Targetp. 468
The Inflationary Bias of Discretionary Policyp. 469
Extensions of the Basic Analysisp. 476
Optimal Responses to Disturbancesp. 484
Cost-Push Shocksp. 486
Fluctuations in the Natural Rate of Interestp. 501
Optimal Simple Policy Rulesp. 507
The Optimal Noninertial Planp. 510
The Optimal Taylor Rulep. 513
The Optimal State-Contingent Instrument Path as a Policy Rulep. 517
Commitment to an Optimal Targeting Rulep. 521
Robustly Optimal Target Criteriap. 522
Implementation of a Target Rulep. 527
Optimal Monetary Policy Rulesp. 534
A General Linear-Quadratic Frameworkp. 535
Optimal State-Contingent Pathsp. 536
Alternative Forms of Policy Rulesp. 543
Robustness to Alternative Types of Disturbancesp. 547
Existence of Robustly Optimal Policy Rulesp. 550
Optimal Instrument Rulesp. 555
Optimal Inflation Targeting Rulesp. 559
A Model with Inflation Inertiap. 560
A Model with Wages and Prices Both Stickyp. 565
A Model with Habit Persistencep. 568
Predetermined Spending and Pricing Decisionsp. 569
Optimal Policy for a Small Quantitative Modelp. 573
Optimal Interest-Rate Rulesp. 582
An Optimal Rule for the Basic Neo-Wicksellian Modelp. 583
Consequences of Inflation Inertiap. 592
Predetermined Spending and Pricing Decisionsp. 604
Optimal Policy under Imperfect Informationp. 606
Reflections on Currently Popular Policy Proposalsp. 610
The Taylor Rulep. 610
Inflation-Forecast Targetingp. 619
Appendixes
Addendum to Chapter 2p. 627
Addendum to Chapter 3p. 656
Addendum to Chapter 4p. 656
Addendum to Chapter 5p. 687
Addendum to Chapter 6p. 692
Addendum to Chapter 7p. 709
Addendum to Chapter 8p. 716
Referencesp. 747
Indexp. 765
Table of Contents provided by Publisher. All Rights Reserved.

ISBN: 9780691010496
ISBN-10: 0691010498
Series: International Studen
Audience: Tertiary; University or College
Format: Hardcover
Language: English
Number Of Pages: 808
Published: 7th September 2003
Publisher: Princeton University Press
Country of Publication: US
Dimensions (cm): 23.5 x 15.2  x 4.45
Weight (kg): 1.25