Woodford and Wicksell on Interest and Prices: The place of the pure credit economy in the theory of monetary policy

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Acknowledgments

He is grateful to Rhys Mendes for stimulating his thoughts on the issues dealt with here.

Notes

¹How that importance manifests itself will depend on the nature what Brunner and Meltzer (e.g. 1993) used to call “the money supply process,” and how much of a role monetary aggregates can be given in any policy framework will depend on that, as well as upon the stability of their demand functions.

²In this respect, Woodford writes in the tradition of those Swedish economists who, like Bertil Ohlin (1936), saw Wicksell has having liberated monetary economics from “the tyranny of the quantity of money.” As I have argued in Laidler (1999a, Ch. 3) the Stockholm School's attempts to escape were less successful than they perhaps thought. Woodford does find a minor role for the quantity of money in some versions of his general system, as a passively determined variable whose quantity can nevertheless exercise an apparently trivial “real balance effect” on expenditure.

³The Stockholm School, however, being students of Cassel and Fisher, as well as Wicksell, were acutely aware of this issue. See Laidler (1999a, chapter 3).

⁴On this matter, see Laidler (1999b) and Humphrey (2003).

⁵To use the vocabulary still popular at the Bank of Canada, monetary aggregates seem to remain active variables in the transmission mechanism, despite being determined endogenously to the system. For a recent discussion of this, see Longworth (2003).

⁶Though there is some precedent for the application of Wicksellian theory to the conduct of monetary policy in a single country, because his “policy norm” of raising (lowering) interest rates whenever prices rose (fell) was eventually to be implemented by Sweden acting in isolation at a time when the international monetary system had already collapsed. See Jonung (1979) for an account of this episode.

⁷Though readers in such countries will have to take it for granted their flexible exchange rate regimes render them “as if closed,” a postulate that is by no means uncontroversial. Thus Interest and Prices cannot be used to teach monetary policy course in such countries without some supplementary readings on the workings of flexible exchange rate regimes.

⁸Woodford does not ignore fiscal policy and indeed makes it clear that his model implies the desirability that it remain restrained. But he mainly deals with fiscal policy as a factor that can shift the IS curve when it is not “Ricardian,” and does not emphasize seigniorage as a source of revenue and the fundamental interdependence of monetary and fiscal policy that stem from this. It does not seem to have crossed Wicksell's mind that the abandonment of specie convertibility as a basis for the international monetary system while maintaining fixed exchange rates, measures that he proposed in 1898, might tempt governments to use that system as a source of seigniorage, but nowadays we know better.

⁹The following few paragraphs draw on a recent critique of Svensson's paper (Laidler 2004) which is, in some respects a companion piece to this one.

¹⁰See Laidler (1999), chapter 5 for a discussions of Hawtrey's views on the cycle, and chapter 10 for Keynes on the liquidity trap.

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Notes on contributors

David Laidler

The author is Professor Emeritus at the University of Western Ontario, and Scholar in Residence at the C. D. Howe Institute.