The Friedman Rule:Experimental Evidence

53 Pages Posted: 3 Jan 2019 Last revised: 28 Sep 2020

See all articles by John Duffy

John Duffy

University of California, Irvine

Daniela Puzzello

Indiana University Bloomington - Department of Economics

Date Written: December 17, 2018

Abstract

We explore the celebrated Friedman rule for optimal monetary policy in the context of a laboratory economy based on the Lagos-Wright model. The rule that Friedman proposed can be shown to be optimal in a wide variety of different monetary models, including the Lagos-Wright model. However, we are not aware of any prior empirical evidence evaluating the welfare consequences of the Friedman rule. We explore two implementations of the Friedman rule in the laboratory. The first is based on a deflationary monetary policy where the money supply contracts to offset time discounting. The second implementation pays interest on money removing the private marginal cost from holding money. We explore the welfare consequences of these two theoretically equivalent implementations of the Friedman Rule and compare results with two other policy regimes, a constant money supply regime and another regime advocated by Friedman, where the supply of money grows at a constant k-percent rate. We find that, counter to theory, the Friedman rule is not welfare improving, performing no better than a constant money regime. By one welfare measure, we find that the k-percent money growth rate regime performs best.

Keywords: Money, Search, Monetary Policy, Friedman Rule, Experimental Economics

JEL Classification: C92, D83, E31, E52

Suggested Citation

Duffy, John and Puzzello, Daniela, The Friedman Rule:Experimental Evidence (December 17, 2018). Available at SSRN: https://ssrn.com/abstract=3302859 or http://dx.doi.org/10.2139/ssrn.3302859

John Duffy (Contact Author)

University of California, Irvine ( email )

Department of Economics
3151 Social Science Plaza
Irvine, CA 92697
United States
949-824-8341 (Phone)

Daniela Puzzello

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall
Bloomington, IN 47405-6620
United States

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