Information and Expectations in Policy-Making: Friedman's Changing Approaches to Macroeconomic Dynamics

Sylvie Rivot
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Sylvie Rivot: BETA

No 2020-39, GREDEG Working Papers from Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France

Abstract: The paper shows how Friedman gradually came to incorporate the expectations formation process in his account of macroeconomic disequilibria. It is shown that Friedman's early Monetarism relies on slowly adjusting prices and wages, mainly because of long-term contracts. When he first addressed the expectations issue in his work macroeconomic dynamics Friedman actually considered static expectations. In the mid-1960s his anticipationist critique of the Phillips curve led Friedman to place at the centre of the analysis the idea that private agents progressively adjust their forecasts to a new informational environment. Nevertheless, adaptive expectations involve backward-looking behaviour regarding the price structure, without taking account of the probable effect of discretionary policy on the economy in the future; hence economic agents make systematic forecasting errors. Friedman eventually considered forward-looking behaviour in the 1970s but stopped short of fully embracing the rational expectations approach to economic policy. In Friedman's later Monetarism there is an echo of Friedman's early joint work with Savage regarding attitudes towards risk based on the subjective probability approach. But this is the residual outcome of a very lengthy process.

Keywords: Friedman; adaptive expectations; rational expectations; static expectations; dynamics; monetary economy (search for similar items in EconPapers)
JEL-codes: B22 B31 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2020-10
New Economics Papers: this item is included in nep-his, nep-hpe and nep-mac
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