FEDS 2018-013: Seven Fallacies Concerning Milton Friedman’s “The Role of Monetary Policy”

This is an International Finance Discussion Papers (IFDP) published by the Board of Governors of the U.S. Federal Reserve System

Edward Nelson | This paper analyzes Milton Friedman's (1968) article "The Role of Monetary Policy," via a discussion of seven fallacies concerning the article. These fallacies are: (1) "The Role of Monetary Policy" was Friedman's first public statement of the natural rate hypothesis. (2) The Friedman-Phelps Phillips curve was already presented in Samuelson and Solow's (1960) analysis. (3) Friedman's specification of the Phillips curve was based on perfect competition and no nominal rigidities. (4) Friedman's (1968) account of monetary policy in the Great Depression contradicted the Monetary History's version. (5) Friedman (1968) stated that a monetary expansion will keep the unemployment rate and the real interest rate below their natural rates for two decades. (6) The zero lower bound on nominal interest rates invalidates the natural rate hypothesis. (7) Friedman's (1968) treatment of an interest-rate peg was refuted by the rational expectations revolution. The d iscussion lays out the reasons why each of these seven items is a fallacy and infers key aspects of the framework underlying Friedman's (1968) analysis.

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