Milton Friedman, the Demand for Money and the ECB’s Monetary-Policy Strategy

Stephen Hall, P.A.V.B. Swamy and George Tavlas

No 12/05, Discussion Papers in Economics from Division of Economics, School of Business, University of Leicester

Abstract: The European Central Bank (ECB) assigns a greater weight to the role of money in its monetary-policy strategy than most, if not all, other major central banks. Nevertheless, reflecting the view that the demand for money became unstable in the early-2000s, some commentators in the press have reported that the ECB has “downgraded” the role of money-demand functions in its strategy. This paper explains the ECB’s monetary-policy strategy and shows the considerable influence of Milton Friedman’s contributions on the formulation of that strategy. The paper also provides new evidence on the stability of euro-area money-demand. Following a conjecture made by Friedman (1956), we assign a role to uncertainty in the money-demand function. We find that, although uncertainty is mean–reverting, it is none-the-less non-stationary, subject to wide swings, and has substantial effects on the demand for money.

Keywords: ECB’s monetary-policy strategy; Milton Friedman; money demand (search for similar items in EconPapers)
JEL-codes: C20 E41 (search for similar items in EconPapers)
Date: 2012-04
New Economics Papers: this item is included in nep-cba, nep-eec, nep-hpe, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Journal Article: Milton Friedman, the demand for money, and the ECB’s monetary policy strategy (2012)
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