The role of financial policy

Abstract

I review the contribution and influence of Milton Friedman's 1968 presidential address to the American Economic Association. I argue that Friedman's influence on the practice of central banking was profound and that his arguments in favour of monetary rules were responsible for 30 years of low and stable inflation in the period from 1979 through 2009. I present a critique of Friedman's position that market economies are self-stabilizing and I describe an alternative reconciliation of Keynesian economics with Walrasian general equilibrium theory from that which is widely accepted today by most neoclassical economists. My interpretation implies that government should intervene actively in financial markets to stabilize economic activity.