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The Friedman Rule: Experimental Evidence

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  • John Duffy
  • Daniela Puzzello

Abstract

We evaluate the Friedman rule for optimal monetary policy in a laboratory economy based on Lagos–Wright (Journal of Economic Theory 145 (2010), 1508–24). We explore two implementations of Friedman's rule: one involving deflationary monetary policy and another where interest is paid on money. We compare the welfare consequences of the Friedman rule with two other policies: a constant money supply regime and a regime where the money supply grows at a constant k%. Counter to theory, we find that the Friedman rule is not welfare‐improving, performing no better than the constant money regime. By one welfare measure, the k% money growth rate regime performs best.

Suggested Citation

  • John Duffy & Daniela Puzzello, 2022. "The Friedman Rule: Experimental Evidence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(2), pages 671-698, May.
    • Handle: RePEc:wly:iecrev:v:63:y:2022:i:2:p:671-698
    DOI: 10.1111/iere.12549
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    Cited by:

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    2. Janet Hua Jiang & Peter Norman & Daniela Puzzello & Bruno Sultanum & Randall Wright, 2024. "Is Money Essential? An Experimental Approach," Journal of Political Economy, University of Chicago Press, vol. 132(9), pages 2972-2998.
    3. Alessandro Marchesiani, 2022. "The Essentiality of Money in a Trading Post Economy with Random Matching," Working Papers 202223, University of Liverpool, Department of Economics.
    4. Alessandro Marchesiani, 2024. "The essentiality of money in a trading post economy with random matching," Oxford Economic Papers, Oxford University Press, vol. 76(3), pages 823-836.

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