DP3506 News-Magazine Monetarism

Author(s): Edward Nelson

Publication Date: August 2002

Keyword(s): monetary aggregates , monetary policy shocks , output gap

JEL(s): E51 , E52 , E58

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP3506.asp

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.