In response to my skepticism about monetary frictions, Stephen Williamson says that I “need to learn some monetary economics”. We’ll see.
It’s useful to think about the precise difference between the “New Keynesian” (Woodford) and “New Monetarist” (Williamson) effects of monetary policy. In New Keynesian models, monetary policy is important primarily because it affects the real interest rate, shaping patterns of consumption and investment across time. If interest rates are high, it’s expensive to buy a car or build a factory, and even ordinary consumption becomes less attractive compared to the return from saving. If interest rates are too high, consumers spend less than the economy can produce, and we see a recession. A good example of this type of model is in Eggertsson and Woodford’s classic piece on the liquidity trap.
In New Monetarist models, monetary policy is important for a completely different reason. Certain kinds of…
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Utopia, you are standing in it! 
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