Should We Be Afraid of Friedman's Rule?

Tilburg University, CentER Working Paper No. 2000-62

Posted: 19 Oct 2000

See all articles by Harald Uhlig

Harald Uhlig

University of Chicago - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 2000

Abstract

Should one think of zero nominal interest rates as an undesirable liquidity trap or as the desirable Friedman rule? I use three different frameworks to discuss this issue. First, I restate Cole and Kocherlakota's (1998) analysis of Friedman's rule: short run increases in the money stock - whether through issuing spending coupons, open market operations or foreign exchange intervention - change nothing as long as the money stock shrinks in the long run. Second, two simple "Keynesian" models of the inflationary process with a zero lower bound on nominal interest rates imply either that deflationary spirals should be common or that a policy close to the Friedman rule and thus some deflation is optimal. Finally, a formal "baby-sitting coop" model implies multiple equilibria, but does not support the injection of liquidity to restore the good equilibrium, in contrast to Krugman (1998).

Keywords: Friedman's rule, liquidity trap, cash in advance, baby sitting coop, zero lower bound on nominal interest rates, deflation, deflationary spiral, Japan, optimal monetary policy

JEL Classification: E31, E41, E50, E51, E52

Suggested Citation

Uhlig, Harald, Should We Be Afraid of Friedman's Rule? (July 2000). Tilburg University, CentER Working Paper No. 2000-62, Available at SSRN: https://ssrn.com/abstract=246845

Harald Uhlig (Contact Author)

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
674
PlumX Metrics