Questions about Recent Monetary Policy

Friday, November 9, 2012

I am grateful for the opportunity to participate in this centennial celebration of Milton Friedman and the Power of Ideas. Thank you for inviting me.

I got to know Milton Friedman after he left the University of Chicago and joined Stanford’s Hoover Institution. I learned a lot from him during those years especially about his approach to economic research and the rigorous and demanding way he combined theory and facts. But I also learned about policy. An example occurred when I took leave from Stanford to serve on President George H.W. Bush’s Council of Economic Advisers. One day I was given the job of calling economists, including Milton, to get support for the president’s “revenue enhancement” or tax increase proposal. Milton quickly realized why I was calling and before I even asked the question he simply said, “The answer is no!” adding “Washington is corrupting you, John. You better come back right away.”

Lars Hansen, the moderator of this session on monetary policy and the macro economy, asks the following

“Friedman advocated the use of a simple and transparent rule for the conduct of monetary policy in normal times. The conduct of monetary policy since the outset of the financial crisis has been arguably creative, but this outcome challenges policy transparency going forward. How do you see Fed behavior at this juncture? To what extent has monetary policy alone run out of gas in nurturing a more healthy macroeconomic recovery?”

To address these questions let me start by going back to the talk I gave at Milton Friedman’s 90th birthday celebration here at the University of Chicago in November 2002 exactly ten years ago. The main purpose of that talk was to demonstrate the power of Milton Friedman’s ideas about monetary economics and policy. I showed how the performance of the American economy had improved greatly in the 1980s and 1990s compared to previous periods, especially the late 1960s and 1970s. The volatility of output had come down, the unemployment rate had come down, and the inflation rate had come down. I also showed how monetary policy had become more rule-like—more predictable, less discretionary, more steadily focused on the goal of price stability in the 1980s and 1990s—along the lines that Milton Friedman long advocated. 

Read the full transcript: friedman-centennial-remarks.pdf