WINNER OF THE NOBEL PRIZE IN ECONOMICS

A landmark reexamination of monetary economics that shows how interest-rate policy can be used to achieve inflation targets

With the collapse of the Bretton Woods system, any pretense of a connection between the world’s currencies and any real commodity has been abandoned. Yet since the 1980s, most central banks have also discarded money-growth targets as practical guidelines for monetary policy. How can pure “fiat” currencies be managed in a way that creates confidence in the stability of national units of account? In Interest and Prices, Nobel Prize–winning economist Michael Woodford provides theoretical foundations for a rule-based approach to monetary policy for a world of instant communications and ever more efficient financial markets. Reexamining the foundations of monetary economics, he shows how interest-rate policy can be used to achieve an inflation target in the absence of either commodity backing or control of a monetary aggregate.

Interest and Prices further demonstrates how the tools of modern macroeconomic theory can be used to design an optimal inflation-targeting regime—one that balances stabilization goals with the pursuit of price stability in a way that is grounded in an explicit welfare analysis and that takes account of the “New Classical” critique of traditional policy evaluation exercises. The book argues that rule-based policymaking need not mean adherence to a rigid framework unrelated to stabilization objectives for the sake of credibility and explains the advantages of rule-based over purely discretionary policymaking.