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Fiscal versus Monetary Policy in the 1960s

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  • Friedman, Milton

    (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)

Abstract

In this lecture, Milton Friedman reviews the role of fiscal and monetary policies on the course of the U.S. business cycle, during several episodes from 1961 to 1969. He relates these developments to shifts in contemporary popular and scientific opinion about the determinants of the business cycle. In each episode of expansion or contraction, he shows that monetary policy – in the sense of changes in the rate of growth of the quantity of money – decisively dominated over fiscal policy in determining the pace of economic activity and the rate of inflation. During the lecture, Friedman makes several digressions to explain the variability of the lag in effect of monetary policy, the reason why interest rates are a poor guide to the stance of monetary policy, and why the downward-sloping liquidity preference function is a poor model that fails to comport with the real world. He also explains why tax increases are not necessarily contractionary, and why tax decreases are not necessarily expansionary.

Suggested Citation

  • Friedman, Milton, 2021. "Fiscal versus Monetary Policy in the 1960s," Studies in Applied Economics 186, The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise.
    • Handle: RePEc:ris:jhisae:0186
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