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The Friedman Rule and Optimal Monetary Policy

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  • R. Todd Smith

Abstract

The appeal of Milton Friedman's (1969) zero-nominal-interest-rate policy derives from the simplicity of the argument and the relative ease with which it could be implemented. This paper shows, however, that there are likely many monetary policies (and inflation rates) consistent with a zero nominal interest rate and social welfare varies across these policies. The main implication is that one ought to be careful in selecting a monetary policy to implement Friedman's proposal. This point is illustrated in a model in which the Friedman rule is desirable but the optimal monetary policy is different from that which is typically attributed to Friedman's proposal.

Suggested Citation

  • R. Todd Smith, 1998. "The Friedman Rule and Optimal Monetary Policy," Canadian Journal of Economics, Canadian Economics Association, vol. 31(2), pages 295-302, May.
    • Handle: RePEc:cje:issued:v:31:y:1998:i:2:p:295-302
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    Cited by:

    1. Bhattacharya, Joydeep & Haslag, Joseph & Martin, Antoine, 2009. "Optimal monetary policy and economic growth," European Economic Review, Elsevier, vol. 53(2), pages 210-221, February.
    2. Ho Wai-Ming, 2020. "Liquidity constraints, international trade, and optimal monetary policy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 20(2), pages 1-29, June.
    3. Yazmín V. Soriano-Morales & Francisco Venegas-Martínez & Benjamín Vallejo-Jiménez, 2015. "Determination of the equilibrium expansion rate of money when money supply is driven by a time-homogeneous Markov modulated jump diffusion process," Economics Bulletin, AccessEcon, vol. 35(4), pages 2074-2084.

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