Friday, January 13, 2012

What Do We Know about Monetary Policy that Friedman Did Not Know

In many respects, modern monetary policy remains largely framed by Milton
Friedman’s writings. This concerns the fundamental view that price stability is
the central bank’s key responsibility and that the output or unemployment gaps
are, at best, temporary objectives. Many details of the channels of monetary
policy described by Friedman and Schwartz also remain central to central bank
operations. On the other hand, today’s central banks deal with issues that have
surfaced over the last three decades, many of which are not yet fully resolved.
The crisis of the 2000s has led to unprecedented actions by central banks around
the world which previously would have seemed impossible or outright nonsensical....

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