Friedman, Chicago, and Monetary Rules

We discuss the development of policy rules at the University of Chicago and compare those rules with modern, Taylor-type rules. A key feature of the 1930s Chicago approach was the view that discretionary monetary policy has a destabilizing effect on the economy. Empirical confirmation of this view was provided by Friedman and Schwartz during the 1950s. Friedman’s empirical findings that: (1) the money supply can be controlled by the monetary authorities; and (2) the demand for money exhibits secular stability, provided the underpinnings for his money-supply rule. Friedman’s statistical approach led him to believe that relationships formed on the basis of structural-parameter estimates within the cycle were likely to be unreliable. Both the Friedman rule and the Taylor rule share several important characteristics, including the focus on reducing both policy uncertainty and the possibility of reducing the policy mistakes of the past. We argue, however, that an implicit aspect of modern rules may pave the way for a return to discretion.