2001 Chapters (Layout Features)

Monetary Policy in the Information Economy

Woodford, Michael

From page 298 -- 'Here, I consider two possible grounds for such concern. I first consider the consequences of increased information on the part of market participants about monetary policy actions and decisions. According to the view that the effectiveness of monetary policy is enhanced by, or even entirely dependent upon, the ability of central banks to surprise the markets, there might be reason to fear that monetary policy will be less effective in the information economy. I then consider the consequences of financial innovations tending to reduce private-sector demand for the monetary base. These include the development of techniques that allow financial institutions to more efficiently manage their customers’ balances in accounts subject to reserve requirements and their own balances in clearing accounts at the central bank, so that a given volume of payments in the economy can be executed with a smaller quantity of central-bank balances. And somewhat more speculatively, some argue that “electronic money” of various sorts may soon provide alternative means of payment that can substitute for those currently supplied by central banks. It may be feared that such developments can soon eliminate what small leverage central banks currently have over the private economy, so that again monetary policy will become ineffective.'