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Title: Should We be Afraid of Friedman's Rule?

Author(s): Harald Uhlig

Publication Date: September 2000

Keyword(s): Baby-Sitting Coop, Cash In Advance, Deflation, Deflationary Spiral, Friedman's Rule, Japan, Liquidity Trap, Optimal Monetary Policy and Zero Lower Bound On Nominal Interest Rates

Programme Area(s): International Macroeconomics

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).

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Bibliographic Reference

Uhlig, H. 2000. 'Should We be Afraid of Friedman's Rule?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2548