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The optimum quantity of money

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  • Daniel Sanches
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    Abstract

    A central premise of monetary policy in the U.S. throughout the first decade of the 21st century has been a firm commitment to avoid deflation. Indeed, it is the consensus view of policymakers and most economists. Nonetheless, Nobel laureate Milton Friedman proposed that optimal monetary policy should lead to a steady rate of deflation. For some economists, the Friedman rule is mainly a benchmark for thinking clearly about the assumptions underlying our models and a systematic guide for deciding how to modify our models, that is, a way of making scientific progress. However, it is not an exaggeration to say that most of the work in the field of monetary theory has focused on identifying situations in which Friedman’s insight does not apply. In this article, Daniel Sanches discusses the Friedman rule and the main arguments that have been made against it.

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    File URL: http://www.philadelphiafed.org/research-and-data/publications/business-review/2012/q4/brq412_optimum-quantity-of-money.pdf
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    Bibliographic Info

    Article provided by Federal Reserve Bank of Philadelphia in its journal Business Review.

    Volume (Year): (2012)
    Issue (Month): Q4 ()
    Pages: 8-15

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    Handle: RePEc:fip:fedpbr:y:2012:i:q4:p:8-15

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    Related research

    Keywords: Monetary policy ; Friedman; Milton;

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    1. S. Boragan Aruoba & Frank Schorfheide, 2009. "Sticky prices versus monetary frictions: an estimation of policy trade-offs," Working Papers 09-8, Federal Reserve Bank of Philadelphia.
    2. Andolfatto, David, 2007. "Essential Interest-Bearing Money," MPRA Paper 4780, University Library of Munich, Germany.
    3. Cooley, T.F. & Hansen, G.D., 1988. "The Inflation Tax In A Real Business Cycle Model," RCER Working Papers 155, University of Rochester - Center for Economic Research (RCER).
    4. Edward J. Green & Ruilin Zhou, 2002. "Money as a mechanism in a Bewley economy," Working Paper Series WP-02-15, Federal Reserve Bank of Chicago.
    5. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, vol. 68(2), pages 247-274, March.
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