Nobel Prize winner: Friedman

Milton Friedman (1912-2006)

Professor University of Chicago since 1948

Nobel Prize in 1976 :
"for his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy”

Studied at Rutgers Uni, Uni of Chicago

Contributions


  1. Consumption analysis
  1. Monetary theory

Consumption function

Permanent income hypothesis:

Implication:

Permanent income: average income over years

Permanent income determines consumption

Fiscal policy less effective in influencing consumption/investment

Investment multiplier is overstated

Consumption does not respond to transitory income shocks

Instability of economy is overstated

Relation to Keynes:

Friedman: marginal propensity to consume out of changes in current income is smaller than in Keynesian theory

Fiscal policy is ineffective
Governments should influence permanent income

Permanent income (rather than current income) matters for
consumption choices

Monetary theory

  1. Causes of the Great Depression
  1. Ineffectiveness of Fiscal policy
  1. The modern quantity theory of money
  1. Long-run vertical Philips curve
  1. The demand for money
  1. The “monetary rule”

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