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Mr. Woodford and the Challenge of Finance

Published online by Cambridge University Press:  11 June 2009

Perry Mehrling
Perry Mehrling
Affiliation:
Barnard College, Columbia University.
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Once one recognizes that many prices (and wages) are fairly sticky over short time intervals, the arbitrariness of the path of nominal prices (in the sense of their under-determination by real factors alone) implies that the path of real activity and the associated path of equilibrium real interest rates are equally arbitrary. It is equally possible, from a logical standpoint, to imagine allowing the central bank to determine, by arbitrary fiat, the path of aggregate real activity, or the path of real interest rates, as it is to imagine allowing it to determine the path of nominal interest rates. In practice, it is easiest for central banks to exert relatively direct control over overnight nominal interest rates, and so they generally formulate their short-run objectives (their operating target) in terms of the effect that they seek to bring about in this variable rather than in one of the others.

Type
Research Article
Information
Journal of the History of Economic Thought , Volume 28 , Issue 2 , June 2006 , pp. 161 - 170
Copyright
Copyright © The History of Economics Society 2006

References

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