Michael Woodford’s Contributions to Monetary Economics

Michael Woodford has contributed so much important and path-breaking research that it would be impossible to cover all of it in this talk. Also, I have had a difficult time knowing whether to speak about his contributions or about the New-Keynesian approach more generally. So I will start with neither of these and instead try to tell a bit about Woodford as a person, but from a professional perspective. I believe that I first met him in 1985 at a research conference in Austin, Texas, where we were both presenting papers on monetary economics conducted in overlapping generation (OG) models. I was, at the time, having arguments with some economists who had been deriving several startling results in OG models, basically because their setups gave “money” no medium-of-exchange properties — it provided no transaction-facilitating services to its holders. It also paid no interest, so if the model economy included capital or land no one would want to hold any money unless prices were falling rapidly enough. I thought that this was a foolish approach, but was very nervous about making the argument because these other economists were quite prominent — and I feared that Michael would support their position. Well, it turned out that his model did give money a medium-of-exchange role, so that was fine with me.¹ That was my first indication that Woodford rarely (if ever) does anything that is truly foolish.

Paper prepared for presentation at the Center for Financial Studies academic symposium, ”The Theory and Practice of Monetary Policy Today,” in honor of Professor Michael Woodford, recipient of the Deutsche Bank Prize in Financial Economics 2007 (held at Frankfurt University on October 4, 2007). I am indebted to Marvin Goodfriend for helpful comments.