A Post-Crisis Reading of the ‘Role of Monetary Policy’

11 February 2014
Publication Type: Working Paper
JEL Code: B22, E52, E58

In 1967 Milton Friedman delivered “The Role of Monetary Policy’ as his presidential address to the American Economic Association (AEA). In its published version – Friedman (1968) – it has become, arguably, the most influential paper in modern monetary economics and was recently included in the AEA’s list of the twenty most influential papers published in the first century of the American Economic Review. But the influence of Friedman’s address is based on an interpretation that seriously distorts the content of his main argument. His emphasis on (i) the inadequacy of interest rate policy and (ii) the primacy of financial stability among the positive goals of monetary policy have been ignored or neglected. While balance sheet policies have become ‘unconventional’ in the modern consensus, these policies held a central position in Friedman’s work. I support this argument with a textual analysis of Friedman’s address, read in the light of his preceding scholarship on monetary policy. This reinterpretation is relevant in a world where the balance sheets of central banks have returned to centre stage as has the priority for financial stability.

Series title: Working paper 419
1 February 2014
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