Milton Friedman Monetary Policy Summary

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In The American Economic Review (1948), The Role of the Monetary Policy by Milton Friedman debates about how monetary policy can affect an economy. In the earlier days the responsibles of the monetary authorites were to stifle any rise in the interest rate, price and output stability and to maintain the gold standard. The monetary authories did not pay much attention to the monetary policies which lead to the The Great Contraction which destroyed the economy. This prove to show that Keynesian was impotent to suggested that the depression was caused by collapsing of investment, shortage of investment opportunities and stubborn thriftiness. The author ridicules other economists about their point of view of The Great Contraction and the solution …show more content…
Milton demonstrated strong analytical skills, possibly because of the wide range of knowledge he had from being an economist. In evaluating Milton Friedman’s argument, it is possible to find some valid points about the monetary policy. One occurs when he stated that the monetary policy cannot peg interest rate and unemployment for long period of time. The monetary authorities can only fix the interest rate and unemployment for short period of time in order to influence the financial condition that will increase investmet and household spending in an economy. Mahadeva and Sterne (2000) said that the “central bank sets the interest rate for short term profit and establish a relationship between unemployment and interest rate to influence financial condition, in turn to affect the aggregate demand.” In addition, if the monetary policy is not regulated properly it will caused a volatile economy which will lead to loss in investments, high inflation rate, unemployment, collapsing of financial institution and escalated interest rate and price. Walsh (2009) asserts the monetary policy main role is economy stability in which its objectives should be transparent and regulated properly to avoid a unstabilized economy. Also Svensson (2003) said “economic stability, including a well-functioning payment system, can conveniently be considered as a restriction on monetary policy that does not bind in normal times, but does …show more content…
Woodfords (2003) said “the monetary policy is disciplined by clear rules intended to ensure a stable standard of value, rather than one that is determined on a purely discretionary basis to serve whatever ends may seems most pressing at any given time.” Moreover, the monetary authorises should avoid sharp swing in the policies because it can affect an economy stability. This article has the capability to alter people’s view on monetary policy. Someone who is biased or naïve in thinking that the role of the monetary policy is still about the gold standard can easily be conceived that the monetary policy does play other roles in order to achieve sustainable growth for an economy. Also a reader that is of the same view of the author will enjoy reading the article because it educates the public and the monetary authorities in what the monetary policy can and cannot do and how should the monetary authorises conduct the monetary policy to obtain economy stability. The article The Role of the Monetary Policy makes the point that the gold standard is not the main role of the monetary policy but prevention of money from been a major source of economic disturbance, provide a stable background for the economy and offsetting major economic system disturbance caused by other sources are the roles of the monetary policy. In concluding

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