Here, I'll give a quick overview of the thrust of Friedman's address, a plug for the recent number of the Journal of Economic Perspectives, which has a lot more, too indicate out a useful follow-up article that clears upwards but about misconceptions almost Friedman's 1968 speech.
The Winter 2018 number of the Journal of Economic Perspectives, where I operate every bit Managing Editor, nosotros published a three-paper symposium on "Friedman's Natural Rate Hypothesis After 50 Years." The papers are:
- "Friedman's Presidential Address inwards the Evolution of Macroeconomic Thought," yesteryear N. Gregory Mankiw too Ricardo Reis (pp. 81-96)
- "Should We Reject the Natural Rate Hypothesis?" yesteryear Olivier Blanchard (pp. 97-120)
- "Short-Run too Long-Run Effects of Milton Friedman's Presidential Address," yesteryear Robert E. Hall too Thomas J.Sargent (pp. 121-34)
I won't seek to summarize the papers here, along amongst the many themes they offering on how Friedman's spoken communication influenced the macroeconomics that followed or what aspects of Friedman's analysis possess got held upwards ameliorate than others. But to giver a feel of what's a stake, here's an overview of Friedman's themes from the newspaper yesteryear Mankiw too Reis:
"Using these themes of the classical long run too the centrality of expectations, Friedman takes on policy questions amongst a uncomplicated bifurcation: what monetary policy cannot practise too what monetary policy tin do. It is a segmentation that remains useful today (even though, every bit nosotros hash out later, modern macroeconomists mightiness include dissimilar items on each list).
"Friedman begins amongst what monetary policy cannot do. He emphasizes that, except inwards the brusque run, the fundamental depository fiscal establishment cannot peg either involvement rates or the unemployment rate. The declaration regarding the unemployment charge per unit of measurement is that the trade-off described yesteryear the Phillips bend is transitory too unemployment must eventually render to its natural rate, too so whatever sweat yesteryear the fundamental depository fiscal establishment to accomplish otherwise volition pose inflation into an unstable spiral. The declaration regarding involvement rates is similar: because nosotros tin never know amongst much precision what the natural charge per unit of measurement of involvement is, whatever sweat to peg involvement rates volition also probable Pb to inflation getting out of control. From a modern perspective, it is noteworthy that Friedman does non consider the possibility of feedback rules from unemployment too inflation every bit ways of setting involvement charge per unit of measurement policy, which today nosotros telephone phone “Taylor rules” (Taylor 1993).
"When Friedman turns to what monetary policy tin do, he says that the “first too most of import lesson” is that “monetary policy tin foreclose coin itself from beingness a major origin of economical disturbance” (p. 12). Here nosotros reckon the profound influence of his operate amongst Anna Schwartz, specially their Monetary History of the United States. From their perspective, history is replete amongst examples of erroneous fundamental depository fiscal establishment actions too their consequences. The severity of the Great Depression is a instance inwards point.
"It is pregnant that, piece Friedman is oft portrayed every bit an advocate for passive monetary policy, he is non dogmatic on this point. He notes that “monetary policy tin contribute to offsetting major disturbances inwards the economical organization arising from other sources” (p. 14). Fiscal policy, inwards particular, is mentioned every bit 1 of these other disturbances. Yet he cautions that this activist utilization should non live taken also far, inwards calorie-free of our express powerfulness to recognize shocks too approximate their magnitude inwards a timely fashion. The concluding department of Friedman’s presidential address concerns the deport of monetary policy. He argues that the primary focus should live on something the fundamental depository fiscal establishment tin command inwards the long run—that is, a nominal variable ... "
Edward Nelson offers a useful follow-up to these JEP papers in “Seven Fallacies Concerning Milton Friedman’s `The Role of Monetary Policy,'" Finance too Economics Discussion Series 2018-013, Board of Governors of the Federal Reserve System, Nelson summarizes at the start:
"[T]here has been widespread too lasting credence of the paper’s seat that monetary policy tin accomplish a long-run target for inflation but non a target for the grade of output (or for other existent variables). For example, inwards the United States, the Federal Open Market Committee’s (2017) “Statement on Longer-Run Goals too Policy Strategy” included the observations that the “inflation charge per unit of measurement over the longer run is primarily determined yesteryear monetary policy, too thus the Committee has the powerfulness to specify a longer-run destination for inflation,” too that, inwards contrast, the “maximum grade of occupation is largely determined yesteryear nonmonetary factors,” so “it would non live appropriate to specify a fixed destination for employment.”Nelson too so lays out 7 fallacies. The details are inwards his paper: here, I but listing the fallacies amongst a few words of his explanations.
Fallacy 1: “The Role of Monetary Policy” was Friedman’s showtime world declaration of the natural charge per unit of measurement hypothesis
"Certainly, Friedman (1968) was his most extended joint of the ideas (i) that an expansionary monetary policy that tended to raise the inflation charge per unit of measurement would non permanently lower the unemployment rate, too (ii) that full employment too toll stability were compatible objectives over long periods. But Friedman had outlined the same ideas inwards his writings too inwards other world outlets on several before occasions in the 1950s too 1960s."
Fallacy 2: The Friedman-Phelps Phillips bend was already presented inwards Samuelson too Solow’s (1960) analysis
"A key article on the Phillips bend that is oft juxtaposed amongst Friedman (1968) is Samuelson too Solow (1960). This newspaper is oft (and correctly, inwards the acquaint author’s view) characterized as advocating the seat that at that spot is a permanent tradeoff betwixt the unemployment charge per unit of measurement and inflation inwards the United States."
Fallacy 3: Friedman’s specification of the Phillips bend was based on perfect contest too no nominal rigidities
"Modigliani (1977, p. 4) said of Friedman (1968) that “[i]ts basic message was that, despite appearances, reward were inwards reality perfectly flexible.” However, Friedman (1977, p. 13) took exception to this interpretation of his 1968 paper. Friedman pointed out that the Definition of the natural charge per unit of measurement of unemployment that he gave inwards 1968 had recognized the existence of imperfectly competitive elements inwards the setting of wages, including those arising from regulation of task markets. Further back upwards for Friedman’s arguing that he had non assumed a perfectly competitive task marketplace seat is given yesteryear the cloth inwards his 1968 newspaper that noted the slow adjustment of nominal reward to need too provide pressures. ... Consequently, that (1968 Friedman] framework is
consistent amongst prices beingness endogenous—both responding to, too serving every bit an impetus for, output movements—and the overall toll grade non beingness fully flexible inwards the brusque run."
Fallacy 4: Friedman’s (1968) concern human relationship of monetary policy inwards the Great Depression contradicted the Monetary History’s version
"But the fact of a abrupt turn down inwards the monetary base of operations during the prelude to, too early on stages of, the 1929-1933 Great Contraction is non inwards dispute, too it is this turn down to which Friedman (1968) was presumably referring."
Fallacy 5: Friedman (1968) stated that a monetary expansion volition proceed the unemployment charge per unit of measurement too the existent involvement charge per unit of measurement below their natural rates for 2 decades
"[T]these statements are inferences from the next passage inwards Friedman (1968, p. 11): “But how long, you lot volition say, is ‘temporary’? … I tin at most corporation a personal judgment, based on some exam of the historical evidence, that the initial effects of a higher too unanticipated rate of inflation lastly for something similar 2 to v years; that this initial effect too so begins to be reversed; too that a total adjustment to the novel charge per unit of measurement of inflation takes almost every bit long for employment every bit for involvement rates, say, a duad of decades.” The passage of Friedman (1968) but quoted does not, inwards fact, imply that a policy involving a shift to a novel inflation charge per unit of measurement involves 20 years of one-sided unemployment too real-interestrate gaps. Such prolonged gaps instead autumn nether the heading of Friedman’s “initial effects” of the monetary policy change—effects that he explicitly associated amongst a two-to-five-year period, with the gaps receding beyond this period. Friedman described “full adjustment” every bit comprising decades, but such consummate adjustment includes the lingering dynamics beyond the main dynamics associated amongst the initial two-to-five twelvemonth period. It is the two-to-five twelvemonth menstruation that would live associated amongst the mass of the nonneutrality of the monetary policy change."
Fallacy 6: The nothing lower jump on nominal involvement rates invalidates the natural charge per unit of measurement hypothesis
"A zero-bound province of affairs undoubtedly makes the analysis of monetary policy to a greater extent than difficult. In addition, the fundamental depository fiscal establishment inwards a zero-bound province of affairs has fewer tools that it tin deploy to create aggregate need than it has inwards other circumstances. But, of import every bit these complications are, neither of them implies that the long-run Phillips bend is non vertical."
Fallacy 7: Friedman’s (1968) handling of an interest-rate peg was refuted yesteryear the rational expectations revolution.Since the JEP published this symposium, I've run across but about younger economists who possess got never read Friedman's speak too lack fifty-fifty a full general familiarity amongst his argument. For academic economists of whatever vintage, it's an easily readable spoken communication worth becoming acquainted with--or revisiting. Sumber http://conversableeconomist.blogspot.com/
"The propositions that the liquidity effect fades over fourth dimension too that existent involvement rates cannot live targeted inwards the long run yesteryear the fundamental depository fiscal establishment stay widely accepted today. These valid propositions underpinned Friedman’s critique of pegging of nominal involvement rates."
Comments