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IV.H. - Milton Friedman for example has advocated that...

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IV. H. Monetary Policy You may have noticed from the data we have looked at or from personal experience that inflation is always positive. This seems strange. Inflation is generally regarded as a bad thing. Inflation we know can be controlled in the long-run by money growth. So why do monetary authorities systematically let so much money come into the economy that we have positive inflation? Why this inflationary bias in the setting of monetary policy? Why not set money growth so that inflation, on average, is zero?
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Unformatted text preview: Milton Friedman, for example, has advocated that central banks should be constrained by law to set money growth so that the average inflation is zero. This is an example of a monetary rule . We will show that monetary rules are not likely to be strictly followed. The temptation to deviate from zero-inflation money growth will create an equilibrium where inflation is positive. The Price Misperception model forms the basis of this possible explanation. Barro Ch.15 PP 12-16...
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