Notes on Woodford "Interest & Prices" 03 - KS
p. 1-3
The first thee pages of Woodford are really very revealing
to me. He paints a glowing picture of the success of
inflation targeting, and views the operation of central
banks as highly successful. That was in 2003. He
references a 1999 book by Bernanke et al. on Inflation
Targeting. He touts the importance of some central banks
(like England, Canada, New Zealand, Sweden) communicating
their policy to the public, publishing inflation reports
and even forecast models.
He describes this book as an attempt to provide the
theoretical foundation for all this, as if it's
just a matter of cleaning up some details.
It's all wonderful. He really believes macro problems
like inflation and boom/bust cycles are essentially solved,
or at least under control.
pp. 6-10
the general view seems to be to "optimally" adjust interest rates
history: neo-classical (Lucas)
RBC (real business cycles) Kydland & Prescott 82, Long & Plosser 83
p. 9
"AS equation (the monetary policy rule..." -- doesn't explain abbreviation
p. 10
on "forward-looking" in structural relations:
mentions IS = "Investment-Spending" relation, what we call save/consume split
traditional macro models often include the effect of "lagged rather than current
interest rates". Rotemberg & Woodford 97, interest-sensitive component of
private spending is predetermined, though chosen in a forward-looking way."
p. 10-11 (intro and preliminary justification of DSGE model)
microeconomic foundations and policy analysis: "foundations in individual optimization"
argues that this answers objections raised by Lucas 76 (what i believe is called Lucas's Critique,
see p. 11) This seems to be where the aggregated, representative household and firm (private sector)
idea is introduced in DSGE.
Says optimization models not detailed enough for real use by banks, but are "representative
of crucial elements..."
p. 12 Delays in adjustment of wages and prices raise stability questions. Looks ahead to Chapter 6.
Desirable inflation target should take into account the most sticky prices, including wages insofar
as they are sticky.
p. 14 Importance of Policy Commitment: (a) important for central bank's policy to be predictable;
(b) if the central bank acts as if it cannot commit itself to any future actions, its actions will
be suboptimal --> these two reasons explained in the next two subsections, pp. 15-24.
p. 352ff Section 5.3: "Monetary Policy and Investment Dynamics"
p. 372ff Section 5.3.4: "Capital and the Natural Rate of Interest"
p. 375:
"Of all the possible sources of variation in the natural rate of
interest, variations owing to changes in the economy's aggregate
capital ought to be the easiest for a central bank to track with
some accuracy (owing to the slowness of movements in the
capital stock).
Interesting that he worries here about the central bank tracking the
effect of capital on the (natural) interest rate, rather than the
other way around.