The Great Policy Debate: Assessing the Relative Roles of Monetary and Fiscal Policy from Friedman to the Present

This book illuminates important contemporary economic debates from a deeply rooted monetarist perspective, emphasizing the unquestionably predominant role of monetary policy in determining macroeconomic outcomes. The presented studies question the fundamental tools and analytical frameworks of modern central banking while paying tribute to the enduring intellectual legacy of Milton Friedman, one of economics' most influential figures. The COVID-19 pandemic, which began in March 2020 and the unprecedented economic responses that followed, has necessitated a reassessment of the reliability of traditional economic models and indicators. In particular, the ability of popular tools such as the Financial Conditions Index (FCI) to explain the complexity of the monetary policy transmission mechanism and its driving forces is being seriously questioned. The first article in this collection sharply compares the FCI model to Friedman's predictive monetarist model. The argument is that the post-March 2020 experience perfectly aligns with the monetarist framework, which demonstrates that movements in interest rates can be explained by a two-stage process: the liquidity effect and the Fisher effect, which follow changes in the money growth rate and act in opposite directions. This finding demonstrates that the FCI approach, which ignores money supply growth when assessing the stance of monetary policy and relies on a composite index based on interest rates and spreads, produces inconsistent and even contradictory results.