Monetary Policy and its Theoretical Foundations

David Laidler

No 20058, University of Western Ontario, Economic Policy Research Institute Working Papers from University of Western Ontario, Economic Policy Research Institute

Abstract: This paper briefly discusses why a monetary policy framework that emphasises interest rates has become standard in recent years, and why so many economists have been persuaded simultaneously to downgrade the importance of monetary aggregates. Then it describes Michael Woodford's particular contribution to these developments, and contrasts it with a more traditional approach to the theory of money that stresses its means of exchange role. It suggests that, though there are difficulties aplenty with the latter, Woodford's cashless simplification of the monetary economy presents problems of its own, both for monetary theory per se, and for the discussion of currently relevant monetary policy questions. It concludes that the theoretical basis for monetary policy should embrace wary eclecticism.

Keywords: money; interest rates; inflation; monetarism; cashless economy; open-market operations rates; unemployment; multiplier (search for similar items in EconPapers)
JEL-codes: E10 E31 E42 E44 E52 E58 (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-hpe, nep-mac and nep-mon
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