INTEREST AND PRICES: FOUNDATIONS OF A THEORY OF MONETARY POLICY

The evolution of research on monetary policy over the past two decades has been dramatic

Michael Woodford; CARL E. WALSH

2005

Scholarcy highlights

  • The evolution of research on monetary policy over the past two decades has been dramatic
  • Much of this work builds on the basic foundations provided by the marriage of dynamic stochastic general equilibrium models, with their emphasis on optimizing behavior by economic agents and careful attention to budget constraints and equilibrium conditions, with simple models of price stickiness
  • The research that has developed since these early papers has provided new insights into the transmission process of monetary policy, the objectives of stabilization policy, and the relationship between policy rules and the determinacy of equilibrium, to mention just a few of the topics that have been explored
  • Michael Woodford has been a major contributor in each of these areas, and in Interest and Prices, he provides what will be widely recognized as the definitive treatise on the new Keynesian approach to monetary policy
  • It is a measure of the recent progress in monetary analysis that many of Woodford's results are well known, thanks to the working paper versions of the book's chapters, Woodford's other writings, and the research of many other academic and central bank economists
  • Every page is filled with nuanced discussions of special cases, exceptions, and extensions to the basic framework, and the approach to monetary economics and policy design is characterized by a consistency that allows readers to sample from among the various chapters
  • This argues for viewing the approach to policy that Woodford develops as an important starting point for further research that will investigate the manner in which these rules must be modified to address the uncertainty about the economy's structure that policymakers confront in practice

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