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Nobel Prize winner: Friedman (Monetary theory (Causes of the Great…
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
Consumption analysis
Monetary theory
Consumption function
Permanent income hypothesis:
Permanent income: average income over years
Permanent income determines consumption
Implication:
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
Causes of the Great Depression
Ineffectiveness of Fiscal policy
The modern quantity theory of money
Long-run vertical Philips curve
The demand for money
The “monetary rule”