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The optimum quantity of money

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  • Daniel R. Sanches

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.

Suggested Citation

  • Daniel R. Sanches, 2012. "The optimum quantity of money," Business Review, Federal Reserve Bank of Philadelphia, issue Q4, pages 8-15.
    • Handle: RePEc:fip:fedpbr:y:2012:i:q4:p:8-15
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    File URL: https://www.philadelphiafed.org/-/media/frbp/assets/economy/articles/business-review/2012/q4/brq412_optimum-quantity-of-money.pdf
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    References listed on IDEAS

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    4. Andolfatto, David, 2010. "Essential interest-bearing money," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1495-1507, July.
    5. S. Boragan Aruoba & Frank Schorfheide, 2011. "Sticky Prices versus Monetary Frictions: An Estimation of Policy Trade-Offs," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 60-90, January.
    6. Robert E. Lucas, 2001. "Inflation and Welfare," International Economic Association Series, in: Axel Leijonhufvud (ed.), Monetary Theory as a Basis for Monetary Policy, chapter 4, pages 96-142, Palgrave Macmillan.
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    Cited by:

    1. Daniel R. Sanches, 2014. "Shadow banking and the crisis of 2007-08," Business Review, Federal Reserve Bank of Philadelphia, issue Q2, pages 7-14.
    2. Lawrence H. White, 2025. "Should the Federal Reserve raise its inflation target?," Southern Economic Journal, John Wiley & Sons, vol. 91(4), pages 1372-1390, April.

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