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The Failure of Woodford's Model of the Channel System in the Cashless Economy
Author(s) -
ROGERS COLIN
Publication year - 2011
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2010.00385.x
Subject(s) - settlement (finance) , channel (broadcasting) , central bank , clearing , economics , cash , monetary economics , macroeconomics , monetary policy , computer science , payment , finance , telecommunications
Woodford claims to present a cashless and frictionless model of the channel system of interest rate control. This note explains why Woodford's frictionless model omits an essential feature of channel systems: the need for clearing e‐cash balances at the central bank. Without the existence of some form of final settlement on the books of the central bank channel systems collapse. Woodford makes this conceptual error because he assumes that moneyless accounting systems of exchange can be applied to model e‐cash economies.