Milton Friedman and U.S. Monetary History: 1961-2006

Abstract

This paper brings together, using extensive archival material from several countries, scattered information about Milton Friedman's views and predictions regarding U.S. monetary policy developments after 1960 (i.e., the period beyond that covered by his and Anna Schwartz's Monetary History of the United States). I evaluate these interpretations and predictions in light of subsequent events.

Optimal monetary policy in the monetary union: effects on business cycles

“…It is seen that computed rates are highly fluctuating so that they will absorb the exogenous shocks and maintain the endogenous variables roughly stable. Nelson (2007) cited the monetary policy to offset the fluctuations of other variables, which originate from other source. In defining the thermostat hypothesis, Nelson (2007) concludes ‘if a variable Y has a stochastic relationship with a variable X that monetary policy can affect, a policy that stabilises Y will lead to fluctuations in X to offset other potential sources of variation in Y.…”

“…Nelson (2007) cited the monetary policy to offset the fluctuations of other variables, which originate from other source. In defining the thermostat hypothesis, Nelson (2007) concludes ‘if a variable Y has a stochastic relationship with a variable X that monetary policy can affect, a policy that stabilises Y will lead to fluctuations in X to offset other potential sources of variation in Y. The result will be a low empirical correlation between X and Y, despite the two enjoying a structural relationship’.…”

“…The result will be a low empirical correlation between X and Y, despite the two enjoying a structural relationship’. In another place where Nelson (2007) alluded to Friedman's interview with the Wall Street Journal (06/30/75), he quoted ‘that floating exchange rates had been “effective shock absorbers” against recent year's events, such as the OPEC shock’. Therefore, for being effective in absorbing shocks, as Nelson (2007) concludes, it is important that the exchange rates can fluctuate to absorb asymmetric shocks.…”

How Friedman and Schwartz Became Monetarists

“…This particular definition of money was chosen both because of its close empirical relationship to income and other economic magnitudes and because it was impossible to separate demand and time deposits pre‐1914. Nelson () showed that Friedman's choice of a monetary aggregate would change in the 1980s.…”

In Old Chicago: Simons, Friedman, and the Development of Monetary‐Policy Rules

“…Friedman (, p. 91) stated that “the evidence for this concept is certainly far from conclusive.” In the early‐1980s, he switched to M1. Nelson () provides a discussion of the reasons for the switch.…”