\'The Role of Monetary Policy\' is a significant work by economist Milton Friedman, a key figure in the field of economics. Published in 1968, this paper had a profound impact on the way we understand and implement macroeconomic policy.In this work, Friedman challenges the prevailing economic theories of his time, especially those related to the management of the economy by the government. He argues strongly for the central role of monetary policy – the process by which the monetary authority of a country (like a central bank) controls the money supply and interest rates – in influencing economic conditions.Friedman's main thesis is that effective control and management of the money supply is crucial in regulating economic activity and, most importantly, in controlling inflation. He criticizes the overemphasis on fiscal policy (government spending and taxation) and suggests that it's the monetary policy that should be at the forefront of managing economic stability.This paper is notable for its influence in shaping modern macroeconomic thought and policy. Friedman's insights led to a reevaluation of how central banks operate, moving away from short-term fiscal measures to a focus on long-term monetary stability. His work laid the groundwork for what is now known as monetarism – a theory that emphasizes the importance of controlling the quantity of money in circulation.\'The Role of Monetary Policy\' is not just a piece of economic literature; it's a transformative work that has had lasting implications for global economic policies, especially in how countries tackle issues of inflation and economic growth. It's a must-read for anyone interested in understanding the foundations of contemporary economic policy and the role of central banking in the global economy.
FRIEDMAN: MONETARY POLICY ple, Brazilians did a few years ago. Then wages must rise at that rate simply to keep real wages unchanged. An excess supply of labor will be reflected in a less rapid rise in nominal wages than in anticipated prices,4 not in an absolute decline in wages. When Brazil embarked on a policy to bring down the rate of price rise, and succeeded in bringing the price rise down to about 45 per cent a year, there was a sharp initial rise in unemployment because under the influence of earlier anticipations, wages kept rising at a pace that was higher than the new rate of price rise, though lower than earlier. This is the result experienced, and to be expected, of all attempts to reduce the rate of inflation below that widely anticipated.5
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To avoid misunderstanding, let me emphasize that by using the term "natural" rate of unemployment, I do not mean to suggest that it is immutable and unchangeable. On the contrary, many of the market characteristics that determine its level are man-made and policy-made. In the United States, for example, legal minimum wage rates, the WalshHealy and Davis-Bacon Acts, and the strength of labor unions all make the natural rate of unemployment higher than it would otherwise be. Improvements in employment exchanges, in availability of information about job vacancies and labor supply, and so on, would tend to lower the natural rate of unemployment. I use the term "natural" for the same reason Wicksell did-to try to separate the real forces from monetary forces.
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Let us assume that the monetary authority tries to peg the "market" rate of unemployment at a level below the "natural" rate. For definiteness, suppose that it takes 3 per cent as the target rate and that the "natural" rate is higher than 3 per cent. Suppose also that we start out at a time when prices have been stable and when unemployment is higher than 3 per cent. Accordingly, the authority increases the rate of monetary growth. This will be expansionary. By making nominal cash 4 Strictly speaking, the rise in nominal wages will be less rapid than the rise in anticipated nominal wages to make allowance for any secular changes in real wages.
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For such periods, nominal wages and "real" wages move together. Curves computed for different periods or different countries for each of which this condition has been satisfied will differ in level, the level of the curve depending on what the average rate of price change was. The higher the average rate of price change, the higher will tend to be the level of the curve. For periods or countries for which the rate of change of prices varies considerably, the Phillips Curve will not be well defined. My impression is that these statements accord reasonably well with the experience of the economists who have explored empirical Phillips Curves.
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