IDEAS home Printed from https://ideas.repec.org/a/taf/eujhet/v22y2015i4p601-633.html
   My bibliography  Save this article

Rule-based frameworks in historical perspective: Keynes' and Friedman's monetary policies versus contemporary policy-rules

Author

Listed:
  • Sylvie Rivot

Abstract

This paper compares Keynes' and Friedman's views on monetary policy in the light of contemporary views on this issue. First, it is demonstrated that what are today called 'rules' do not fit into a Friedmanite tradition, basically because of Friedman's refusal to allow any discretion to monetary authorities and his model-uncertainty argument. Second, it is shown that Keynes' monetary guidelines are also in fact 'rules', although his conception of a 'discretionary rule' is in sharp contrast with contemporary conceptions. What is ultimately at stake here is the capacity of collective bodies to behave efficiently, and the role played by uncertainty in the economy.

Suggested Citation

  • Sylvie Rivot, 2015. "Rule-based frameworks in historical perspective: Keynes' and Friedman's monetary policies versus contemporary policy-rules," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 22(4), pages 601-633, August.
    • Handle: RePEc:taf:eujhet:v:22:y:2015:i:4:p:601-633
    DOI: 10.1080/09672567.2013.792369
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/09672567.2013.792369
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/09672567.2013.792369?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Taylor, John B., 2001. "An Interview With Milton Friedman," Macroeconomic Dynamics, Cambridge University Press, vol. 5(1), pages 101-131, February.
    2. Frederic S. Mishkin, 2009. "Is Monetary Policy Effective during Financial Crises?," American Economic Review, American Economic Association, vol. 99(2), pages 573-577, May.
    3. Svensson, Lars E O, 1997. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts," American Economic Review, American Economic Association, vol. 87(1), pages 98-114, March.
    4. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
    5. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
    6. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(1), pages 147-180.
    7. Alain Béraud & Gilbert Faccarello, 2000. "Nouvelle Histoire de la Pensée Economique, tome 2," Post-Print halshs-00201474, HAL.
    8. M. G. Hayes, 2006. "The Economics of Keynes," Books, Edward Elgar Publishing, number 12601.
    9. Trevithick, James A, 1975. "Keynes, Inflation and Money Illusion," Economic Journal, Royal Economic Society, vol. 85(337), pages 101-113, March.
    10. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    11. Marvin Goodfriend, 2007. "How the World Achieved Consensus on Monetary Policy," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 47-68, Fall.
    12. Laidler, David, 1981. "Monetarism: An Interpretation and an Assessment," Economic Journal, Royal Economic Society, vol. 91(361), pages 1-28, March.
    13. Friedman, Milton, 1982. "Monetary Policy: Theory and Practice: A Reply," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(3), pages 404-406, August.
    14. Backhouse,Roger E. & Bateman,Bradley W. (ed.), 2006. "The Cambridge Companion to Keynes," Cambridge Books, Cambridge University Press, number 9780521600606.
    15. Milton Friedman, 2001. "Friedman on Friedman," Rivista di storia economica, Società editrice il Mulino, issue 1, pages 127-132.
    16. Lars E. O. Svensson, 2003. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 426-477, June.
    17. Edward Nelson, 2008. "Friedman and Taylor on monetary policy rules: a comparison," Review, Federal Reserve Bank of St. Louis, vol. 90(Mar), pages 95-116.
    18. Taylor, John B, 1979. "Estimation and Control of a Macroeconomic Model with Rational Expectations," Econometrica, Econometric Society, vol. 47(5), pages 1267-1286, September.
    19. Henry C. Simons, 1936. "Rules versus Authorities in Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 44(1), pages 1-1.
    20. Milton Friedman & David Laidler, 2010. "Trade-offs in Monetary Policy," Palgrave Macmillan Books, in: Robert Leeson (ed.), David Laidler’s Contributions to Economics, chapter 7, pages 114-127, Palgrave Macmillan.
    21. Edward Nelson, 2007. "Milton Friedman and U.S. monetary history: 1961-2006," Review, Federal Reserve Bank of St. Louis, vol. 89(May), pages 153-182.
    22. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1.
    23. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-472, June.
    24. J. Bradford De Long, 2000. "The Triumph of Monetarism?," Journal of Economic Perspectives, American Economic Association, vol. 14(1), pages 83-94, Winter.
    25. Milton Friedman & Anna J. Schwartz, 1987. "Has Government Any Role in Money?," NBER Chapters, in: Money in Historical Perspective, pages 289-314, National Bureau of Economic Research, Inc.
    26. Milton Friedman & Anna J. Schwartz, 1982. "Monetary Trends in the United States and United Kingdom: Their Relation to Income, Prices, and Interest Rates, 1867–1975," NBER Books, National Bureau of Economic Research, Inc, number frie82-2.
    27. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    28. McCallum, Bennett T., 1999. "Issues in the design of monetary policy rules," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 23, pages 1483-1530, Elsevier.
    29. Laidler,David, 1999. "Fabricating the Keynesian Revolution," Cambridge Books, Cambridge University Press, number 9780521641739.
    30. Olivier Blanchard & Giovanni Dell’Ariccia & Paolo Mauro, 2010. "Rethinking Macroeconomic Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 199-215, September.
    31. Olivier Blanchard, 2000. "What Do We Know about Macroeconomics that Fisher and Wicksell Did Not?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(4), pages 1375-1409.
    32. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    33. Robert Leeson, 1999. "Keynes and the “Keynesian” Phillips Curve," History of Political Economy, Duke University Press, vol. 31(3), pages 493-509, Fall.
    34. Friedman, Milton, 1982. "Monetary Policy: Theory and Practice," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(1), pages 98-118, February.
    35. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
    36. Milton Friedman, 2005. "A Natural Experiment in Monetary Policy Covering Three Episodes of Growth and Decline in the Economy and the Stock Market," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 145-150, Fall.
    37. Ben S. Bernanke, 2010. "Monetary policy and the housing bubble: a speech at the Annual Meeting of the American Economic Association, Atlanta, Georgia, January 3, 2010," Speech 499, Board of Governors of the Federal Reserve System (U.S.).
    38. John Smithin, 2003. "Controversies in Monetary Economics," Books, Edward Elgar Publishing, number 2541.
    39. Olivier Blanchard & Giovanni Dell'Ariccia & Paolo Mauro, 2010. "Rethinking Macroeconomic Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 199-215, September.
    40. Brian Snowdon & Howard R. Vane, 1999. "Conversations with Leading Economists," Books, Edward Elgar Publishing, number 1607.
    41. John B. Taylor, 2009. "Getting Off Track - How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis," Books, Hoover Institution, Stanford University, number 3, December.
    42. repec:fip:fedgsq:y:2010:x:4 is not listed on IDEAS
    43. Geoff Tily, 2006. "Keynes's theory of liquidity preference and his debt management and monetary policies," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 30(5), pages 657-670, September.
    44. Orphanides, Athanasios, 2003. "Historical monetary policy analysis and the Taylor rule," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 983-1022, July.
    45. Mauro Boianovsky & Hans-Michael Trautwein, 2006. "Price expectations, capital accumulation and employment: Lindahl's macroeconomics from the 1920s to the 1950s," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 30(6), pages 881-900, November.
    46. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    47. Jörg Bibow, 2002. "Keynes on Central Banking and the Structure of Monetary Policy," History of Political Economy, Duke University Press, vol. 34(4), pages 749-787, Winter.
    48. Hoover, Kevin D, 1984. "Two Types of Monetarism," Journal of Economic Literature, American Economic Association, vol. 22(1), pages 58-76, March.
    49. Mark Hayes, 2006. "The Economics of Keynes: A New Guide to The General Theory," Books, Post Keynesian Economics Society (PKES), number nggt.
    50. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
    51. Backhouse,Roger E. & Bateman,Bradley W. (ed.), 2006. "The Cambridge Companion to Keynes," Cambridge Books, Cambridge University Press, number 9780521840903.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Harris Dellas & George S. Tavlas, 2016. "Friedman and the Bernanke-Taylor Debate on Rules versus Constrained Discretion," Cato Journal, Cato Journal, Cato Institute, vol. 36(2), pages 297-313, Spring/Su.
    2. James Forder, 2016. "What was the message of Friedman," Economics Series Working Papers 814, University of Oxford, Department of Economics.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Singleton,John, 2010. "Central Banking in the Twentieth Century," Cambridge Books, Cambridge University Press, number 9780521899093.
    2. Issing Otmar & Wieland Volker, 2013. "Monetary Theory and Monetary Policy: Reflections on the Development over the last 150 Years," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 233(3), pages 423-445, June.
    3. Michael Paetz, 2007. "Robust Control and Persistence in the New Keynesian Economy," Quantitative Macroeconomics Working Papers 20711, Hamburg University, Department of Economics.
    4. Akhand Akhtar Hossain, 2009. "Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 12777.
    5. Lars E. O. Svensson & Michael Woodford, 2004. "Implementing Optimal Policy through Inflation-Forecast Targeting," NBER Chapters, in: The Inflation-Targeting Debate, National Bureau of Economic Research, Inc.
    6. Michael Woodford, 2012. "Forecast Targeting as a Monetary Policy Strategy - Policy Rules in Practice," Book Chapters, in: Evan F. Koenig & Robert Leeson & George A. Kahn (ed.), The Taylor Rule and the Transformation of Monetary Policy, chapter 9, Hoover Institution, Stanford University.
    7. P Arestis & A Mihailov, 2009. "Flexible Rules cum Constrained Discretion: A New Consensus in Monetary Policy," Economic Issues Journal Articles, Economic Issues, vol. 14(2), pages 27-54, September.
    8. Lars E. O. Svensson, 2003. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 426-477, June.
    9. van der Ploeg, Frederick, 2004. "Prudent Monetary Policy: Applications of Cautious LQG Control and Prediction," CEPR Discussion Papers 4222, C.E.P.R. Discussion Papers.
    10. Henrik Jensen, 2002. "Targeting Nominal Income Growth or Inflation?," American Economic Review, American Economic Association, vol. 92(4), pages 928-956, September.
    11. repec:spo:wpecon:info:hdl:2441/f4rshpf3v1umfa09lat09b1bg is not listed on IDEAS
    12. Steinsson, Jon, 2003. "Optimal monetary policy in an economy with inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(7), pages 1425-1456, October.
    13. repec:rdg:wpaper:em-dp2007-53 is not listed on IDEAS
    14. Francisco Rosende, 2002. "La Nueva Síntesis Keynesiana: Análisis e Implicancias de Política Monetaria," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 39(117), pages 203-233.
    15. Danfeng Kong, "undated". "Monetary policy rule for China - 1994-2006," EAERG Discussion Paper Series 1405, School of Economics, University of Queensland, Australia.
    16. Frederick van der Ploeg, 2007. "Prudent Monetary Policy and Cautious Prediction of the Output Gap," Economics Working Papers ECO2007/40, European University Institute.
    17. repec:hal:wpspec:info:hdl:2441/f4rshpf3v1umfa09lat09b1bg is not listed on IDEAS
    18. van der Ploeg, Frederick, 2009. "Prudent monetary policy and prediction of the output gap," Journal of Macroeconomics, Elsevier, vol. 31(2), pages 217-230, June.
    19. repec:hal:spmain:info:hdl:2441/f4rshpf3v1umfa09lat09b1bg is not listed on IDEAS
    20. repec:spo:wpmain:info:hdl:2441/f4rshpf3v1umfa09lat09b1bg is not listed on IDEAS
    21. Coenen, Gunter & Wieland, Volker, 2005. "A small estimated euro area model with rational expectations and nominal rigidities," European Economic Review, Elsevier, vol. 49(5), pages 1081-1104, July.
    22. Bennett T. McCallum & Edward Nelson, 2004. "Timeless perspective vs. discretionary monetary policy in forward-looking models," Review, Federal Reserve Bank of St. Louis, vol. 86(Mar), pages 43-56.
    23. Laura Coroneo & Valentina Corradi & Paulo Santos Monteiro, 2018. "Testing for optimal monetary policy via moment inequalities," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 33(6), pages 780-796, September.
    24. Glenn D. Rudebusch, 2002. "Assessing Nominal Income Rules for Monetary Policy with Model and Data Uncertainty," Economic Journal, Royal Economic Society, vol. 112(479), pages 402-432, April.
    25. Jensen, Christian, 2014. "Discretionary policy exploiting learning in a sticky-information model of the inflation-output trade-off: Bridging the gap to commitment," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 150-158.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:eujhet:v:22:y:2015:i:4:p:601-633. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/REJH20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.