Interest and Prices

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With the collapse of the Bretton Woods system, the connection between the world's currencies and real commodities has been abandoned. Since the 1980s, many central banks have also moved away from money-growth targets for monetary policy. This raises the question: how can fiat currencies be managed to instill confidence in national units of account? The text aims to establish theoretical foundations for a rule-based approach to monetary policy in an era of instant communication and efficient financial markets. Effective monetary policy necessitates that central banks articulate their actions clearly. The author reexamines monetary economics and demonstrates how interest-rate policy can achieve inflation targets without commodity backing or control over monetary aggregates. Additionally, it illustrates how modern macroeconomic tools can create an optimal inflation-targeting regime, balancing stabilization goals with price stability through explicit welfare analysis. This approach considers the "New Classical" critique of traditional policy evaluations, arguing that rule-based policymaking can remain flexible and relevant to stabilization objectives, while also highlighting the benefits of rule-based strategies over discretionary ones.