Bernanke is not rejecting Friedman

A Bloomberg article stated that Bernanke is rejecting Friedman and following Keynes by printing money in the current environment (ht The Big Picture). However, this is far from the case.

Friedman believed that in the short run monetary policy could be used for demand management, but in the long-run undisciplined monetary policy will lead to inflation. The key belief here was that the “velocity of money” changes in the short run but is a constant over the long run. Friedman did not like the idea of using “fiscal policy” to manage demand – which is what Keynes proposed in the general theory.

Now, Bernanke doesn’t control fiscal policy – so I don’t think he is siding with Keynes. Further, Friedman blamed the GD on monetary policy being too contractionary – as even though the stock of money rose, the sharp fall in the velocity of money meant that the money supply contracted.

This is the logic Bernanke is using when introducing “credit easing”. Furthermore, in order to avoid the long run inflation problem he has set it up so a lot of the expansionary monetary policy will unwind (although he has committed to low interest rates in the future in order to keep inflation expectations positive).

As a result, I see his actions as completely consistent with Friedman – and I think the article is misleading.

2 replies
  1. Stephen Kirchner
    Stephen Kirchner says:

    Well said. Friedman explicitly advocated debt monetisation for Japan in the 1990s.

    Friedman would not say that velocity is literally constant, but rather that it is a stable function of other variables.

  2. Matt Nolan
    Matt Nolan says:

    @Stephen Kirchner

    Good point. I should have said it was a technological and state dependent constant – that isn’t really much of a constant I guess, but I was always told to call it a technologically determined constant so I’m stuck to it 🙂

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