Friedman's Proposal Research Articles

Mohou být strnulosti nominálních mezd problémem v situaci deflace způsobené hospodářským růstem?

This paper explores whether downward rigidity in nominal wages has negative impacts on the economy in the case of deflation caused by economic growth. In this situation, growth of real wages may be delivered by a fall in the price level even if nominal wages are constant. Hayek's proposal to stabilize MV is studied in detail. The nominal GDP is stabilized within this framework, and when potential output is growing, the price level might decrease. It is derived that this Hayekian rule would lead to a fall in nominal wages in an economy with positive population growth, which restricts the space for deflation. Friedman's proposal to stabilize prices of factors of production is also examined. It results in weaker deflation than Hayek's proposal and no need for decrease in nominal wages. The next part of the article demonstrates that the Hayekian framework may not require a fall in nominal wages in a converging economy if the labour share of income is gradually increasing, even if population growth is positive.

A Monetary and Fiscal Framework for Economic Stability: A Friedmanian Approach to Restoring Growth

In Milton Friedman's 1948 article, A Monetary and Fiscal Framework for Economic Stability, he put forward what he thought was a new proposal calling for the government to run a balanced budget only at full employment, with deficits in recession and surpluses in economic booms. What was unusual about Friedman's proposal was his call to finance budget deficits through money creation; surpluses would destroy money. He thus proposed to combine monetary policy and fiscal policy, using the budget to control monetary emission in a countercyclical manner. Monetarism and Market Liberalism are celebrated around the world today, and Friedman is credited for his role in winning the fight against Keynesianism over the last 50 years. With that reputation, one would think that his 1948 proposal would have been a centerpiece of monetarism. Has it been? This paper traces government spending, surpluses and deficits, and trade balances over the last 50 years to determine whether events have corresponded to Friedman's proposal for creating the monetary and fiscal framework necessary to achieve economic stability. It also makes recommendations, based on that proposal, to halt the current recession and achieve stable economic growth at full employment.

Manipulation in the Treasury Auction Market

This paper analyzes the market manipulation in the Treasury auction market. There exist manipulation strategies for informed manipulation in both discriminatory auction (DA) and uniform price auction (UPA) in equilibrium. The manipulation extent is positively correlated with the potential manipulator's expected payoff, but negatively correlated with the manipulated and the social expected payoff, which implies that the market manipulation should be prohibited. The UPA seems to be more effective to prevent the market manipulation than the DA, while, the DA generates the least as much revenue for Treasury as does the UPA in most cases. This leads to the Treasury Auction Paradox, which gives another view on the Milton Friedman's Proposal. The paradox is solved as for the uninformed manipulation, which provides strong proofs for the existent of DA for Treasury in many countries. The results also provide some predictions for the information content of the price in the when-issued market. When there is no informed participants, there will exist no manipulation strategy in equilibrium in either DA or UPA.

The Friedman Rule and Optimal Monetary Policy

The appeal of Milton Friedman's (1969) zero-nominal-interest-rate policy derives from the simplicity of the argument and the relative ease with which it could be implemented. This paper shows, however, that there are likely many monetary policies (and inflation rates) consistent with a zero nominal interest rate and social welfare varies across these policies. The main implication is that one ought to be careful in selecting a monetary policy to implement Friedman's proposal. This point is illustrated in a model in which the Friedman rule is desirable but the optimal monetary policy is different from that which is typically attributed to Friedman's proposal.

Embedding and Uniqueness in Relationist Theories

Relationist theories of space or space-time based on embedding of a physical relational system A into a corresponding geometrical system B raise problems associated with the degree of uniqueness of the embedding. Such uniqueness problems are familiar in the representational theory of measurement (RTM), and are dealt with by imposing a condition of uniqueness of embeddings up to composition with an “admissible transformation” of the space B. Friedman (1983) presents an alternative treatment of the uniqueness problem for embedding relationist theories, developed independently of RTM. Friedman's approach differs from that of RTM in securing uniqueness by adding new primitives to the physical system A in contrast to the RTM approach which adds new axioms. Friedman's proposal has recently been developed and defended by Catton and Solomon (1988).This method of solving the uniqueness problem is here argued to be substantially inferior to the RTM method, both in practice and in principle. In practice we find that in none of the concrete examples offered to illustrate the method is the uniqueness problem actually solved in general. Moreover we find that in the most interesting case (addition to the system A of a finite number of relations of finite degree) the method is in principle incapable of success for mathematical reasons. In addition to these technical difficulties there are compelling methodological reasons for preferring the RTM method to the method of adding primitives.

Interest on Reserves and Sunspot Equilibria: Friedman's Proposal Reconsidered

Friedman's (1960) proposal to pay interest on (required) reserves is considered in a setting that eliminates the indeterminacy of steady-state equilibrium discussed by Sargent and Wallace (1985). In an overlapping-generations model where the real rate of interest is technologically determined, the payment of interest on reserves results in a determinate, Pareto optimal steady-state equilibrium. However, interest payments on reserves reduce the steady-state welfare of all young agents and, for many economies, result in the existence of stationary sunspot equilibria. This is the case even if such equilibria cannot exist when reserves do not earn interest.

Stability of financing deviations from expected deficits by money creation as opposed to bond creation

Inflationary finance and bond finance of budget deficits can be viewed as alternative endogenous policy rules that can affect macroeconomic aggregates under rational expectations. For greater stability, Friedman (1948) proposes that deviations in the deficit should be accommodated by changing only the money stock and not the bond stock. In a simple model, we find Friedman's proposal is valid under rational expectations.

Reserve ratios: A proposal for change

The paper addresses the problem of Fed control of the money supply and the inherent instability of a fractional reserve banking system which Friedman covered in A Program for Monetary Stability. While Friedman proposed a 100 percent reserve requirement as a solution, this work suggests a change from imposing legal reserve ratios on specific liabilities to one of imposing them on total bank liabilities. Reserve ratios are compared to tax rates. Friedman's proposal is to increase the tax rate to 100 percent on specific liabilities and pay interest on reserve balances at the Fed. The proposal of this paper is to keep the tax rates (present reserve ratios) but change the tax base. It is shown that the Fed would gain control over the maximum expansion of banks, but would lose direct control over specific liabilities. The Fed would not tax some liabilities and subsidize others. The Fed could concentrate on setting the tone of the money market and allow the public to use whatever set of bank liabilities it desires as money without specific penalty.