Channeling Milton Friedman

Ask not what your monetary policy can do for you, but what you can do for your monetary policy. That’s the jist of a 1968 paper by Milton Friedman, the poster-child for monetarist economics, entitled “The Role of Monetary Policy,” whose key questions remain hotly debated more than four decades on. Friedman’s answer is simple (some might argue too simple), and all too familiar to those who read the speeches of present-day Federal Reserve hawks – focus on the only thing monetary policy can truly control, which in Frideman’s view is price stability.

By setting itself a steady course and keeping to it, the monetary authority could make a major contribution to promoting economic stability. By making that course one of steady but moderate growth in the quantity of money, it would make a major contribution to avoidance of either inflation or deflation of prices. […] That is the most that we can ask from monetary policy at our present stage of knowledge.

Friedman’s writing suggests he was not a big fan of the Fed’s own dual-mandate, introduced in 1978. Any effort to goose employment through a persistent period of low very low interest rates, Friedman argues, would likely lead to overshooting and inflation.

The monetary authority should guide itself by magnitudes that it can control, not by ones that it cannot control.

Sound familiar? Here’s Charles Plosser, president of the Philadelphia Fed, last month:

Good-bye to all that

Followers of the dismal science will note the passing of Sir Alan Walters on January 3. Walters was the controversial economist who advised Margaret Thatcher during what turned out — regardless of whether seen as good or bad — to be a revolution in matters both monetary and social.

Walters was one of the first British economists to challenge Keynesian orthodoxy and argue for a monetarist approach to tackling inflation. He may be best remembered, however, for his opposition to the pound joining the Exchange Rate Mechanism, out of which sterling famously crashed in 1992, and for partly prompting the resignation of Chancellor of the Exchequer Nigel Lawson who felt he had too much influence on Thatcher.

In an obituary, The Guardian newspaper concluded: “In the early days of Thatcher’s government, he was a valued member of the small group of outsiders who provided intellectual and academic support for its policies. His departure in 1989 was a symptom, rather than a cause, of the complete breakdown of trust between the prime minister and her chancellor.”