Money as Friction: Conceptual Dissonance in Woodford's Interest and Prices

Colin Rogers (colin.rogers@adelaide.edu.au)
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Colin Rogers: School of Economics, University of Adelaide

No 2008-03, School of Economics and Public Policy Working Papers from University of Adelaide, School of Economics and Public Policy

Abstract: In Interest and Prices Woodford employs a frictionless model to derive nominal interest rate rules that can be applied by central banks to achieve price level stability. But frictionless models are Walrasian general equilibrium models that preclude any role for money. Furthermore frictionless model have no role for nominal values or the price level and therefore no role for a central bank. Consequently, conceptual anomalies arise in Woodford's attempt to analyse questions of monetary theory and policy that are precluded by construction in frictionless models. In some states of the model money is converted into a 'friction', contra economic theory.

Keywords: frictionless models; time-0 auction; 'monetary frictions' (search for similar items in EconPapers)
JEL-codes: B40 E40 E42 E50 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2008
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:adl:wpaper:2008-03

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