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Milton Friedman, the Demand for Money and the ECB’s Monetary-Policy Strategy

Author

Listed:
  • Stephen Hall
  • P.A.V.B. Swamy
  • George S. Tavlas

Abstract

The European Central Bank (ECB) assigns a greater weight to the role of money in its monetary-policy strategy than most, if not all, other major central banks. Nevertheless, reflecting the view that the demand for money became unstable in the early-2000s, some commentators in the press have reported that the ECB has “downgraded” the role of money-demand functions in its strategy. This paper explains the ECB’s monetary-policy strategy and shows the considerable influence of Milton Friedman’s contributions on the formulation of that strategy. The paper also provides new evidence on the stability of euro-area money-demand. Following a conjecture made by Friedman (1956), we assign a role to uncertainty in the money-demand function. We find that, although uncertainty is mean–reverting, it is none-the-less non-stationary, subject to wide swings, and has substantial effects on the demand for money.

Suggested Citation

  • Stephen Hall & P.A.V.B. Swamy & George S. Tavlas, 2012. "Milton Friedman, the Demand for Money and the ECB’s Monetary-Policy Strategy," Discussion Papers in Economics 12/05, Division of Economics, School of Business, University of Leicester.
    • Handle: RePEc:lec:leecon:12/05
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    References listed on IDEAS

    as
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    2. George S. Tavlas, 1998. "Was the Monetarist Tradition Invented?," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 211-222, Fall.
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    6. Stephen G. Hall & George Hondroyiannis & P. A. V. B. Swamy & G. S. Tavlas, 2009. "The New Keynesian Phillips Curve and Lagged Inflation: A Case of Spurious Correlation?," Southern Economic Journal, John Wiley & Sons, vol. 76(2), pages 467-481, October.
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    14. P. Swamy & George Tavlas, 2007. "The New Keynesian Phillips Curve and Inflation Expectations: Re-Specification and Interpretation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 31(2), pages 293-306, May.
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    17. Stephen G. Hall & George Hondroyiannis & P. A. V. B. Swamy & G. S. Tavlas, 2009. "The New Keynesian Phillips Curve and Lagged Inflation: A Case of Spurious Correlation?," Southern Economic Journal, John Wiley & Sons, vol. 76(2), pages 467-481, October.
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    Citations

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    Cited by:

    1. Dreger, Christian & Wolters, Jürgen, 2015. "Unconventional monetary policy and money demand," Journal of Macroeconomics, Elsevier, vol. 46(C), pages 40-54.
    2. Jawadi, Fredj & Sousa, Ricardo M., 2013. "Money demand in the euro area, the US and the UK: Assessing the role of nonlinearity," Economic Modelling, Elsevier, vol. 32(C), pages 507-515.
    3. Dreger, Christian & Wolters, Jürgen, 2016. "On the Empirical Relevance of the Lucas Critique: the Case of Euro Area Money Demand," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 43(1), pages 61-82.
    4. Adnan Haider & Asad Jan & Kalim Hyder, 2013. "On the (Ir)Relevance of Monetary Aggregate Targeting in Pakistan: An Eclectic View," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 18(2), pages 65-119, July-Dec.
    5. Christian Dreger & Malte Rieth & David Pothier, 2015. "Is Globalization Reducing the Ability of Central Banks to Control Inflation? In-Depth Analysis," DIW Berlin: Politikberatung kompakt, DIW Berlin, German Institute for Economic Research, volume 106, number pbk106, April.
    6. Christian Dreger & Dieter Gerdesmeier & Barbara Roffia, 2019. "Re‐vitalizing money demand in the Euro area. Still valid at the zero‐lower bound," Bulletin of Economic Research, Wiley Blackwell, vol. 71(4), pages 599-615, October.
    7. Yannick Roussel & Amjad Ali & Marc Audi, 2021. "Measuring The Money Demand In Pakistan: A Time Series Analysis," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 10(1), pages 27-41, March.
    8. John A. Tatom, 2017. "Globalization and Inflation: a Swiss Perspective," Open Economies Review, Springer, vol. 28(3), pages 523-545, July.
    9. Maciej Ryczkowski, 2015. "Ewolucja pogladow Miltona Friedmana, a ocena polityki pienieznej Fed i EBC w okresie kryzysu finansowego," Working Papers 168/2015, Institute of Economic Research, revised Dec 2015.
    10. Claude Hillinger & Bernd Süssmuth & Marco Sunder, 2015. "The Quantity Theory of Money: Valid Only for High and Medium Inflation?," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot GmbH, Berlin, vol. 61(4), pages 315-329.

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    More about this item

    Keywords

    ECB’s monetary-policy strategy; Milton Friedman; money demand;
    All these keywords.

    JEL classification:

    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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