Working Paper: CEPR ID: DP3506
Authors: Edward Nelson
Abstract: This Paper examines some recent monetary policy debates, in light of commentary on those issues contained in some of the work of Milton Friedman. The specific aspect of Friedman?s work considered here is the commentary on monetary policy in his Newsweek magazine columns from 1966 to 1984. My conclusions from this examination include: (1) In contrast to claims made in the VAR literature, the analysis of monetary policy and the business cycle by Friedman and other critics of monetary policy in the 1960s and 1970s did not assume that the money supply was exogenous, or contend that monetary policy shocks were the dominant source of cyclical fluctuations. Rather, the criticism was of the destabilizing tendency of the monetary policy feedback rule followed in those decades. (2) There is support for the argument of Orphanides (2000a) that many monetary policy prescriptions by commentators in the 1970s were based on over?optimistic estimates of the growth rate of productive potential. Friedman?s Newsweek discussions, like his other work, were unusual for not making policy prescriptions based on output gap estimates.
Keywords: monetary policy shocks; monetary aggregates; output gap
JEL Codes: E51; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Friedman's analysis of monetary policy does not assume the money supply was exogenous (E19) | Relationship between monetary policy and economic fluctuations is intricate (E39) |
| Friedman criticized the destabilizing tendencies of the monetary policy feedback rule (E61) | Such rules exacerbate economic instability (F65) |
| Misestimations of productive capacity (D24) | Subsequent policy errors (E61) |
| Friedman's Newsweek columns do not prescribe monetary policy based on output gap estimates (E19) | Friedman's approach to policy recommendations was distinct from contemporaries (E65) |