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Journal Article
Friedman and Taylor on monetary policy rules: a comparison
The names Milton Friedman and John Taylor are associated with different monetary policy rules; but, as shown in this paper, the difference between their perceptions of how the economy works is not great. The monetary policy rules advanced by Taylor and Friedman are compared by linking the rules to the two economists' underlying views about nominal rigidity, the source of trade-offs, the sources of shocks, and model uncertainty. Taylor and Friedman both emphasized Phillips curve specifications that impose temporary nominal price rigidity and the long-run natural-rate restriction; and they ...
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The Tobin effect and the Friedman rule
This paper addresses whether the Friedman rule can be optimal in an economy in which the Tobin effect is operative. We present an overlapping generations economy with capital in which limited communication and stochastic relocation create an endogenous transaction role for fiat money. We assume a production function with a knowledge externality (Romer-style) that nests economies with endogenous growth (AK form) and those with no long-run growth (the Diamond model). With logarithmic utility, the "anti-Tobin effect" is operative, and the Friedman rule is optimal (that is, ...
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Who is afraid of the Friedman rule?
We explore the connection between optimal monetary policy and heterogeneity among agents. We utilize a standard monetary economy with two types of agents that differ in the marginal utility they derive from real money balances-a framework that produces a nondegenerate stationary distribution of money holdings. Without type-specific fiscal policy, we show that the zero-nominal-interest-rate policy (the Friedman rule) does not maximize type-specific welfare; further, it may not maximize aggregate ex ante social welfare. Indeed one or, more surprisingly, both types of agents may benefit if the ...
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Why does overnight liquidity cost more than intraday liquidity?
In this paper, we argue that the observed difference in the cost of intraday and overnight liquidity is part of an optimal payments system design. In our environment, the interest charged on overnight liquidity affects output, while the cost of intraday liquidity only affects the distribution of resources between money holders and non-money holders. The low cost of intraday liquidity follows from the Friedman rule, but with respect to overnight liquidity, it is optimal to deviate from the Friedman rule. The cost differential simultaneously reduces the incentive to overuse money and encourages ...
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Monetary policy implementation frameworks: a comparative analysis
We compare two stylized frameworks for the implementation of monetary policy. The first framework relies only on standing facilities, and the second one relies only on open market operations. We show that the Friedman rule cannot be implemented in the first framework, but can be implemented using the second framework. However, for a given rate of inflation, we show that the first framework unambiguously achieves higher welfare than the second one. We conclude that an optimal system of monetary policy implementation should contain elements of both frameworks. Our results also suggest that any ...
Working Paper
Milton Friedman and U.K. economic policy: 1938-1979
This paper analyzes the interaction of Milton Friedman and U.K. economic policy from 1938 to 1979. The period under study is separated into 1938-1946, 1946-1959, 1959-1970, and 1970-1979. For each of these subperiods, I consider Friedman's observations on and dealings with key events, issues, and personalities in U.K. monetary policy and in general U.K. economic policy.
Working Paper
Milton Friedman and U.S. monetary history: 1961-2006
This paper brings together, using extensive archival material from several countries, scattered information about Milton Friedman?s views and predictions regarding U.S. monetary policy developments after 1960 (i.e., the period beyond that covered by his and Anna Schwartz?s Monetary History of the United States). I evaluate these interpretations and predictions in light of subsequent events.
Working Paper
The impact of Milton Friedman on modern monetary economics: setting the record straight on Paul Krugman’s 'Who Was Milton Friedman?
Paul Krugman?s essay ?Who Was Milton Friedman?? seriously mischaracterizes Friedman?s economics and his legacy. In this paper we provide a rejoinder to Krugman on these issues. In the course of setting the record straight, we provide a self-contained guide to Milton Friedman?s impact on modern monetary economics and on today?s central banks. We also refute the conclusions that Krugman draws about monetary policy from the experiences of the United States in the 1930s and of Japan in the 1990s.
Working Paper
The Taylor rule and the transformation of monetary policy
This paper examines the intellectual history of the Taylor Rule and its considerable influence on macroeconomic research and monetary policy. The paper traces the historical antecedents to the Taylor rule, emphasizing the contributions of three prominent advocates of rules--Henry Simons, A.W. H. Phillips, and Milton Friedman. The paper then examines the evolution of John Taylor's thinking as an academic and policy advisor leading up to his formulation of the Taylor rule. Finally, the paper documents the influence of the Taylor rule on macroeconomic research and the Federal Reserve's conduct ...