The Optimum Quantity of Money

Abstract

A central premise of monetary policy in the U.S. throughout the first decade of the 21st century has been a firm commitment to avoid deflation. Indeed, it is the consensus view of policymakers and most economists. Nonetheless, Nobel laureate Milton Friedman proposed that optimal monetary policy should lead to a steady rate of deflation. For some economists, the Friedman rule is mainly a benchmark for thinking clearly about the assumptions underlying our models and a systematic guide for deciding how to modify our models, that is, a way of making scientific progress. However, it is not an exaggeration to say that most of the work in the field of monetary theory has focused on identifying situations in which Friedman’s insight does not apply. In this article, Daniel Sanches discusses the Friedman rule and the main arguments that have been made against it.

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