The Friedman Rule and Optimal Monetary Policy

Richard Smith

Canadian Journal of Economics, 1998, vol. 31, issue 2, 295-302

Abstract: The appeal of Milton Friedman's (1969) zero-nominal-interest-rate policy derives from the simplicity of the argument and the relative ease with which it could be implemented. This paper shows, however, that there are likely many monetary policies (and inflation rates) consistent with a zero nominal interest rate and social welfare varies across these policies. The main implication is that one ought to be careful in selecting a monetary policy to implement Friedman's proposal. This point is illustrated in a model in which the Friedman rule is desirable but the optimal monetary policy is different from that which is typically attributed to Friedman's proposal.

Date: 1998
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