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THE FRIEDMAN RULE: EXPERIMENTAL EVIDENCE

John Duffy () and Daniela Puzzello ()

International Economic Review, 2022, vol. 63, issue 2, 671-698

Abstract: We evaluate the Friedman rule for optimal monetary policy in a laboratory economy based on Lagos–Wright (Journal of Economic Theory 145 (2010), 1508–24). We explore two implementations of Friedman's rule: one involving deflationary monetary policy and another where interest is paid on money. We compare the welfare consequences of the Friedman rule with two other policies: a constant money supply regime and a regime where the money supply grows at a constant k%. Counter to theory, we find that the Friedman rule is not welfare‐improving, performing no better than the constant money regime. By one welfare measure, the k% money growth rate regime performs best.

Date: 2022
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International Economic Review is currently edited by Michael O'Riordan and Dirk Krueger

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