Automatism or discretion in monetary policy?

Abstract

It is generally excepted that changes in the money supply exert a profound influence on the economic process. The same goes for the resulting conclusion that the creation of money cannot be left to private initiative. These two propositions  pose the questions: (a) what will be the economic effects of a given change in the money supply? (b) how has the money supply to be manipulated, if a specific aim is to be achieved? The present paper deals with the latter of these two questions. The author criticises Milton Friedman’s rule for the regulation of money supply aimed at price stabilisation in which matters are no longer left to the central bank’s discretion but are governed by a process of automation. This rule is based on the assumption of a constant or approximately constant income velocity which, according to the author, is not confirmed by the facts. It is argued that Milton’s conclusions are derived from statistical findings alone, however, the closest correlation between variables can explain nothing about causal relations between the variables or changes of variables.

JEL: E52, E51