Credit and Prices in Woodford’s New Neoclassical Synthesis
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Following the recent debates in the New Neoclassical Synthesis, the theory of monetary policy had been renewed. The method that prevails, illustrated by Woodford’s Interest and Prices, is a Dynamic General Stochastic Equilibrium Model (DGSE) in which the old LM curve is voluntarily substituted by an optimal monetary rule. Such a turning point requires a peculiar set of assumptions especially regarding the monetary prices. The recent debate puts attention on the de-emphasis on nominal monetary aggregate that doesn’t play any explicit role in monetary policy deliberations. Following Calvo’s model, Woodford’s neo-Wicksellian framework only considered monetary prices in equilibrium. As a consequence no cumulative process in the spirit of Wicksell is allowed since monetary policy—under the form of a Taylor rule—always corrects any deviation of monetary prices from its target value. The monetary nature of Woodford’s approach is, then, purely arbitrary. Contrary to Woodford’s ambitions to provide microeconomic foundations of a monetary policy theory, this article tries to demonstrate that Woodford’s approach contains the same problem as the one embodied in the old static macroeconomics model: the lack of an explicit mechanism that endogenously explains the formation of monetary prices emerging from the spontaneous behaviour of the agents in the market.