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Revisiting Friedman's Extended Monetary Framework. The Monetary Theory of Nominal Income

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  • Olivo, Victor

Abstract

This document revisits Milton Friedman's extended monetary framework, specifically focusing on his Monetary Theory of Nominal Income. Friedman’s extended monetary framework remains robust in explaining the dynamic relationship between money supply changes and nominal income fluctuations over more than 150 years of U.S. data. Despite major economic events, this relationship has been stable and significant. The empirical analysis with more recent data continues supporting Friedman's contention that money plays a special role in macroeconomic dynamics, stronger than fiscal variables or interest rates. The methodological debate between Friedman and his critics underscores the importance of empirical causality and practical explanatory power in economic theory. The document concludes that Friedman’s Marshallian approach offers valuable insights that have endured and continue to inform monetary economics.

Suggested Citation

  • Olivo, Victor, 2025. "Revisiting Friedman's Extended Monetary Framework. The Monetary Theory of Nominal Income," MPRA Paper 125716, University Library of Munich, Germany, revised 10 Aug 2025.
    • Handle: RePEc:pra:mprapa:125716
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    References listed on IDEAS

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    4. Pesaran, M. Hashem, 2015. "Time Series and Panel Data Econometrics," OUP Catalogue, Oxford University Press, number 9780198759980.
    5. Milton Friedman, 1971. "Correspondence of the Monetary Theory of Nominal Income with Experience," NBER Chapters, in: A Theoretical Framework for Monetary Analysis, pages 46-48, National Bureau of Economic Research, Inc.
    6. Dallas S. Batten & Rik Hafer, 1983. "The relative impact of monetary and fiscal actions on economic activity: a cross-country comparison," Review, Federal Reserve Bank of St. Louis, vol. 65(Jan), pages 5-12.
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    8. Olivo, Victor, 2023. "Show Me the Money. Why Neglecting Money in Monetary Theory and Policy is a Bad Idea," MPRA Paper 118993, University Library of Munich, Germany, revised 27 Oct 2023.
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    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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