Thursday, October 21, 2010

What Would Milton Friedman Say About Monetary Policy Today?

That is a question William Ruger and I address in an article at Investor's Business Daily. William is a colleague of mine and has just finished a scholarly biography of Milton Friedman. Here is the introduction to our piece :
Four years after his death, Milton Friedman's thoughts on monetary policy remain as relevant today as they were 30 years ago. Even Fed Chairman "Helicopter Ben" Bernanke (whose nickname comes from Friedman's famous "helicopter drop" idea for overcoming deflation) has referenced the Chicago don as an inspiration for his actions.

However, Friedman's views may not be well understood even by those who would claim him as their intellectual fountainhead — which could be problematic for policy-making. So what would Milton Friedman say about our current monetary policy?
We make the case that Milton Friedman would be supportive of more aggressive monetary action at this time. We note that Milton Friedman argued (1) low interest rates do not necessarily mean monetary policy is accommodative, (2) the Fed should target expected inflation, (3) the Fed should do what is necessary to stabilize nominal income, and (4) the Fed is not out of ammunition. Points (1) and (4) are made by Friedman in this article.  Point (2) is outlined in Friedman's book Monetary Mishief.  Point (3) is pervasive throughout Friedman's writings, but here is a recent example.  Our article also draws from Scott Sumner who has made similar arguments  before  about Milton Friedman.  


  1. "In his 1992 book "Money Mischief," Friedman called for legislation requiring the Fed to stabilize the spread between the nominal yield on regular Treasury bonds and the real yield on inflation-protected Treasury bonds (TIPS). This spread is the market's estimate of future inflation."

    I am fortunate to have an autographed copy of "Money Mischief"--but it has no index. Where in this book can the above be found?

  2. Richard:

    It is in the chapter titled "The Cause and Cure of Inflation." In my book that is pages 227-229.

  3. David:

    Your blog and Scott Sumner's have reshaped the way I view monetary policy since I discovered them a month ago, and I mean that in a good way!

    You emphasize the downward stickiness of wages as the channel through which deflation reduces growth; how much weight would you put on this factor under current circumstances vis-a-vis rising real debt burdens and the interest rate effects of long term low inflation expectations?