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, together with signal out a useful follow-up article that clears upwardly roughly misconceptions nearly Friedman's 1968 speech.
The Winter 2018 number of the Journal of Economic Perspectives, where I travel equally 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," past times N. Gregory Mankiw together with Ricardo Reis (pp. 81-96)
- "Should We Reject the Natural Rate Hypothesis?" past times Olivier Blanchard (pp. 97-120)
- "Short-Run together with Long-Run Effects of Milton Friedman's Presidential Address," past times Robert E. Hall together with Thomas J.Sargent (pp. 121-34)
I won't attempt to summarize the papers here, along amongst the many themes they offering on how Friedman's vocalisation communication influenced the macroeconomics that followed or what aspects of Friedman's analysis lead maintain held upwardly ameliorate than others. But to giver a feel of what's a stake, here's an overview of Friedman's themes from the newspaper past times Mankiw together with Reis:
"Using these themes of the classical long run together with the centrality of expectations, Friedman takes on policy questions amongst a unproblematic bifurcation: what monetary policy cannot practise together with what monetary policy tin do. It is a sectionalisation that remains useful today (even though, equally nosotros utter over later, modern macroeconomists powerfulness include dissimilar items on each list).
"Friedman begins amongst what monetary policy cannot do. He emphasizes that, except inwards the curt run, the cardinal banking concern 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 past times the Phillips bend is transitory together with unemployment must eventually render to its natural rate, together with so whatever endeavor past times the cardinal banking concern to hit otherwise volition position 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 endeavor 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 together with inflation equally 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 together with most of import lesson” is that “monetary policy tin preclude coin itself from beingness a major rootage of economical disturbance” (p. 12). Here nosotros consider the profound influence of his travel amongst Anna Schwartz, peculiarly their Monetary History of the United States. From their perspective, history is replete amongst examples of erroneous cardinal banking concern actions together with their consequences. The severity of the Great Depression is a representative inwards point.
"It is pregnant that, piece Friedman is oft portrayed equally 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 arrangement arising from other sources” (p. 14). Fiscal policy, inwards particular, is mentioned equally 1 of these other disturbances. Yet he cautions that this activist purpose should non live taken besides far, inwards lite of our express powerfulness to recognize shocks together with justice their magnitude inwards a timely fashion. The lastly department of Friedman’s presidential address concerns the bear of monetary policy. He argues that the primary focus should live on something the cardinal banking concern 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 together with Economics Discussion Series 2018-013, Board of Governors of the Federal Reserve System, Nelson summarizes at the start:
"[T]here has been widespread together with lasting credence of the paper’s seat that monetary policy tin hit a long-run target for inflation but non a target for the degree 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 together with Policy Strategy” included the observations that the “inflation charge per unit of measurement over the longer run is primarily determined past times monetary policy, together with thus the Committee has the powerfulness to specify a longer-run destination for inflation,” together with that, inwards contrast, the “maximum degree of job is largely determined past times nonmonetary factors,” so “it would non live appropriate to specify a fixed destination for employment.”Nelson together with so lays out vii fallacies. The details are inwards his paper: here, I only listing the fallacies amongst a few words of his explanations.
Fallacy 1: “The Role of Monetary Policy” was Friedman’s offset populace 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, together with (ii) that full employment together with cost stability were compatible objectives over long periods. But Friedman had outlined the same ideas inwards his writings together with inwards other populace outlets on several before occasions in the 1950s together with 1960s."
Fallacy 2: The Friedman-Phelps Phillips bend was already presented inwards Samuelson together with Solow’s (1960) analysis
"A key article on the Phillips bend that is oft juxtaposed amongst Friedman (1968) is Samuelson together with Solow (1960). This newspaper is oft (and correctly, inwards the acquaint author’s view) characterized as advocating the seat that at that topographic point 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 together with 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 project markets. Further back upwardly for Friedman’s contestation that he had non assumed a perfectly competitive project marketplace is given past times the cloth inwards his 1968 newspaper that noted the slow adjustment of nominal reward to need together with provide pressures. ... Consequently, that (1968 Friedman] framework is
consistent amongst prices beingness endogenous—both responding to, together with serving equally an impetus for, output movements—and the overall cost degree non beingness fully flexible inwards the curt 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 refuse inwards the monetary base of operations during the prelude to, together with early on stages of, the 1929-1933 Great Contraction is non inwards dispute, together with it is this refuse 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 together with the existent involvement charge per unit of measurement below their natural rates for ii 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 firm a personal judgment, based on some attempt of the historical evidence, that the initial effects of a higher together with unanticipated rate of inflation lastly for something similar ii to v years; that this initial effect together with so begins to be reversed; together with that a total adjustment to the novel charge per unit of measurement of inflation takes nearly equally long for employment equally for involvement rates, say, a twosome of decades.” The passage of Friedman (1968) only 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 together with 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” equally 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 volume of the nonneutrality of the monetary policy change."
Fallacy 6: The null lower fountain 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 cardinal banking concern 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 equally 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 past times the rational expectations revolution.Since the JEP published this symposium, I've run across roughly younger economists who lead maintain never read Friedman's utter together with lack fifty-fifty a full general familiarity amongst his argument. For academic economists of whatever vintage, it's an easily readable vocalisation communication worth becoming acquainted with--or revisiting. Sumber http://conversableeconomist.blogspot.com/
"The propositions that the liquidity effect fades over fourth dimension together with that existent involvement rates cannot live targeted inwards the long run past times the cardinal banking concern rest widely accepted today. These valid propositions underpinned Friedman’s critique of pegging of nominal involvement rates."
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