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Milton Friedman’s Views on the Interaction of Monetary and Fiscal Policy

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  • Greenwood, John

    (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)

Abstract

This paper first traces the evolution of Milton Friedman’s views on fiscal policy from his early acceptance of the prevailing Keynesian orthodoxy to his later adoption of an entirely contrary view that fiscal policy played almost no role in macroeconomic stabilization. Until the late 1940s or early 1950s Friedman believed that fiscal policy should be the primary tool of government policy in macroeconomic stabilisation – the management of real GDP growth and inflation. However, by 1953 he had shifted to the diametrically opposite view that fiscal policy played almost no role in macroeconomic stabilisation and that as a result policymakers should rely principally on monetary policy. Second, the paper explores some of the theoretical arguments Friedman used to defend his new position. Third, the paper takes up a challenge that Friedman himself proposed to assess the relative importance of monetary and fiscal policies by comparing

Suggested Citation

  • Greenwood, John, 2022. "Milton Friedman’s Views on the Interaction of Monetary and Fiscal Policy," Studies in Applied Economics 206, The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise.
    • Handle: RePEc:ris:jhisae:0206
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