Abstract
Friedman (1968) proposes a constant money growth rate rule to establish the stability of the market economy. We examine whether his suggestion is reasonable or not. We seek to develop the Vanderkamp (1975) model, which captures the essential points of monetarism: the quantity theory of money and the natural rate of unemployment. Our main finding is that the economy experiences chaotic fluctuations around the steady state when the adjustment speed of inflationary expectations is sufficiently slow.
Highlights
Milton Friedman is a leading advocate of monetarism
We have investigated the discrete-time version of the Vanderkamp (1975) model by using nonlinear dynamics
The model is constructed on the basis of the quantity theory of money, the expectations-augmented Phillips curve, and Okun's law
Summary
Milton Friedman is a leading advocate of monetarism. He has full confidence in the inherent stability of the market economy; namely, the economy tends to return to the long-run steady state automatically without government intervention. He has an aversion to discretionary policy to stabilize the economy He emphasizes that monetary disturbances are a main source of economic fluctuations. This topic is studied by Friedman and Schwartz (1963) from an empirical point of view. What is more, he expresses the role of monetary policy in his presidential address to the American Economic Association. He expresses the role of monetary policy in his presidential address to the American Economic Association He declares that a constant money growth rate rule is preferable to discretionary monetary policy.
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