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Friedman and Taylor on monetary policy rules: a comparison

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Abstract

The names Milton Friedman and John Taylor are associated with different monetary policy rules; but, as shown in this paper, the difference between their perceptions of how the economy works is not great. The monetary policy rules advanced by Taylor and Friedman are compared by linking the rules to the two economists' underlying views about nominal rigidity, the source of trade-offs, the sources of shocks, and model uncertainty. Taylor and Friedman both emphasized Phillips curve specifications that impose temporary nominal price rigidity and the long-run natural-rate restriction; and they basically agreed on the specification of shocks, policymaker objectives, and trade-offs. Where they differed was on the extent to which structural models should enter the monetary policy decision-making process. This difference helps account for the differences in their preferred monetary policy rules.

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  • Edward Nelson, 2008. "Friedman and Taylor on monetary policy rules: a comparison," Review, Federal Reserve Bank of St. Louis, vol. 90(Mar), pages 95-116.
    • Handle: RePEc:fip:fedlrv:y:2008:i:mar:p:95-116:n:v.90no.2
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    1. Stephen G. Hall & P. A. V. B. Swamy & George S. Tavlas, 2012. "Milton Friedman, the demand for money, and the ECB’s monetary policy strategy," Review, Federal Reserve Bank of St. Louis, vol. 94(May), pages 153-186.
    2. Jean-Bernard Chatelain & Kirsten Ralf, 2020. "How macroeconomists lost control of stabilization policy: towards dark ages," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 27(6), pages 938-982, November.
    3. James R. Lothian & George S. Tavlas, 2018. "How Friedman and Schwartz Became Monetarists," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(4), pages 757-787, June.
    4. George S. Tavlas, 2015. "In Old Chicago: Simons, Friedman, and the Development of Monetary‐Policy Rules," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(1), pages 99-121, February.
    5. Tavlas, George S., 2021. "A Reconsideration Of The Doctrinal Foundations Of Monetary Policy Rules: Fisher Versus Chicago," Journal of the History of Economic Thought, Cambridge University Press, vol. 43(1), pages 55-82, March.
    6. Charles Ka Yui Leung & Edward Chi Ho Tang, 2023. "The dynamics of the house price‐to‐income ratio: Theory and evidence," Contemporary Economic Policy, Western Economic Association International, vol. 41(1), pages 61-78, January.
    7. Mahir Binici & Yin-Wong Cheung, 2011. "Exchange Rate Dynamics Under Alternative Optimal Interest Rate Rules," Working Papers 362011, Hong Kong Institute for Monetary Research.
    8. Harris Dellas & George S. Tavlas, 2017. "Milton Friedman and the case for flexible exchange rates and monetary rules," Working Papers 236, Bank of Greece.
    9. Peter N. Ireland, 2019. "Monetary Policy Implementation: Making Better and More Consistent Use of the Federal Reserve's Balance Sheet," Journal of Applied Corporate Finance, Morgan Stanley, vol. 31(4), pages 68-76, December.
    10. Daly, Hounaida & Smida, Mounir, 2014. "Fiscal Theory of Price Level," MPRA Paper 60142, University Library of Munich, Germany.
    11. Singleton,John, 2010. "Central Banking in the Twentieth Century," Cambridge Books, Cambridge University Press, number 9780521899093.
    12. Sylvie Rivot, 2015. "Rule-based frameworks in historical perspective: Keynes' and Friedman's monetary policies versus contemporary policy-rules," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 22(4), pages 601-633, August.
    13. Johannes A. Schwarzer, 2018. "Retrospectives: Cost-Push and Demand-Pull Inflation: Milton Friedman and the "Cruel Dilemma"," Journal of Economic Perspectives, American Economic Association, vol. 32(1), pages 195-210, Winter.

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