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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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    File URL: https://mpra.ub.uni-muenchen.de/125716/3/MPRA_paper_125716.pdf
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    References listed on IDEAS

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    1. MacKinnon, James G., 2010. "Critical Values for Cointegration Tests," Queen's Economics Department Working Papers 273723, Queen's University - Department of Economics.
    2. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, March.
    3. Milton Friedman & Anna J. Schwartz, 1982. "Monetary Trends in the United States and United Kingdom: Their Relation to Income, Prices, and Interest Rates, 1867–1975," NBER Books, National Bureau of Economic Research, Inc, number frie82-2, March.
    4. 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.
    5. Milton Friedman, 1971. "Some Dynamic Implications of the Monetary Theory of Nominal Income," NBER Chapters, in: A Theoretical Framework for Monetary Analysis, pages 40-43, National Bureau of Economic Research, Inc.
    6. MacKinnon, James G., 2010. "Critical Values for Cointegration Tests," Queen's Economics Department Working Papers 273723, Queen's University - Department of Economics.
    7. Leonall C. Andersen & Jerry L. Jordan, 1968. "Monetary and fiscal actions: a test of their relative importance in economic stabilization," Review, Federal Reserve Bank of St. Louis, vol. 50(Nov), pages 11-23.
    8. Pesaran, M. Hashem, 2015. "Time Series and Panel Data Econometrics," OUP Catalogue, Oxford University Press, number 9780198759980.
    9. 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.
    10. Michael D. Bordo & Hugh Rockoff, 2013. "Not Just the Great Contraction: Friedman and Schwartz's A Monetary History of the United States 1867 to 1960," American Economic Review, American Economic Association, vol. 103(3), pages 61-65, May.
    11. 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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