Why money growth determines inflation in the long run: answering the Woodford critique

Edward Nelson

No 2008-013, Working Papers from Federal Reserve Bank of St. Louis

Abstract: Woodford (2007) argues that it is not appropriate to regard inflation in the steady state of New Keynesian models as determined by steady-state money growth. Woodford instead argues that the intercept term in the monetary authority's interest-rate policy rule determines steady-state inflation. In this paper, I offer an alternative interpretation of steady-state behavior, according to which it is appropriate to regard steady-state inflation as determined by steady-state money growth. The argument relies on traditional interpretations of the central bank's power in the long run and appeals to model properties that are common to textbook and New Keynesian analysis. According to this argument, the only way the central bank can control interest rates in the long run is via affecting inflation, and its only means available for determining inflation is by determining the money growth rate.

Keywords: Monetary policy; Macroeconomics (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (59)

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Journal Article: Why Money Growth Determines Inflation in the Long Run: Answering the Woodford Critique (2008)
Journal Article: Why Money Growth Determines Inflation in the Long Run: Answering the Woodford Critique (2008)
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