Information, expectations and monetary policy: Keynes’s and Friedman’s complementary lessons for today

This paper considers what lessons there might be for our contemporary ‘monetary consensus’ in Keynes’s and Friedman’s respective policy principles. I focus first on the expectations issue. For both Keynes and Friedman, monetary policy aims at the stabilisation of expectations; and in both cases, major issues arise for knowledge and uncertainty, although each conceives this in a different manner. Next I deal with the core of monetary policy principles: while Keynes’s approach is at odds with our modern strategy of inflation-targeting, Friedman would warn us that, even in this case, interest-rate manipulation might not be the appropriate approach. The analysis concludes with the issue of interest rate determination—the issue of intertemporal coordination and financial stability. Policy principles are always rooted in theoretical investigation: Keynes’s approach is based upon an analysis of intertemporal coordination failures, whereas Friedman’s policy schemes require that financial markets be made perfectly competitive.