Monday, April 27, 2009

Bernanke Is A Friedmanite-Not A Keynesian

While Bernanke in his policies is side-stepping the classical Monetarist prescription to stabilize money supply growth at a moderate level (3 to 5%), there is also a strong case for arguing that he is in fact just following the recommendations of Milton Friedman in his book A Monetary History of the United States. See more here.

I have read that book, but it was a few years since I did it, and I don't own any copy of it, but assuming that this description is correct, it would seem that Friedman believed that during circumstances like this, his own money supply rules should be suspended or overshooted. That interpretation is supported by Friedman recommending double digit money supply growth for Japan during the 1990s.


Anonymous Anonymous said...

I re-read part of the book recently because we had an Austrian seminar in which we invited a famous monetarist economist.

Friedman advocates the k%-rule, but than he defends the activeness of the Fed in 1924 and 1927, rather than its passivity in 1929-1933 in looking monetary aggregates fall.

Those statements may mean either that the Fed shouldn't have let the money supply go down, consistently with the k%-rule, or that a higher money growth rate could be targeted occasionally.

The problem is that if the k% growth did not suffice to keep the banks alive, the banking system would crumble. I'm almost sure that in this case he would have advocated a higher money supply growth, but nothing in the chapter "The great contraction" can be cited as evidence, if I read it well.

However, the article on Japan proves that it would have been deflationary. The monetarist at our seminar denied that Bernanke was monetarist, and surely money growth rates have overshooted, but I left the seminar with the doubt.

I believe that a constant growth of M0 would cause the monetary policy to be quite "goldish", unfortunately discretion by part of Greenspan created problems, by inducing a massive moral hazard. If Friedman advocated discretion in "hard times", then time inconstitency would cause hard times to be far more likely: discretion is self-defeating.


5:23 PM  

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