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Friedman and Taylor on monetary policy rules: a comparison

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  • Edward Nelson

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.

Suggested Citation

  • Edward Nelson, 2008. "Friedman and Taylor on monetary policy rules: a comparison," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 95-116.
  • Handle: RePEc:fip:fedlrv:y:2008:i:mar:p:95-116:n:v.90no.2
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    Cited by:

    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, issue May, pages 153-186.
    2. 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.
    3. Mahir Binici & Yin-Wong Cheung, 2011. "Exchange Rate Dynamics under Alternative Optimal Interest Rate Rules," Working Papers 1116, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    4. Daly, Hounaida & Smida, Mounir, 2014. "Fiscal Theory of Price Level," MPRA Paper 60142, University Library of Munich, Germany.
    5. Singleton,John, 2010. "Central Banking in the Twentieth Century," Cambridge Books, Cambridge University Press, number 9780521899093.
    6. 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.
    7. repec:aea:jecper:v:32:y:2018:i:1:p:195-210 is not listed on IDEAS

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    Keywords

    Friedman; Milton ; Monetary policy ; Taylor's rule;

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