Money Growth Rule :: essays research papers

Money Growth RuleThe Money Growth Rule is based upon a theory originally set forrader by Milton Friedman as a solution to keep the United States economy on a controlled course of harvest-feast. The thoery revolves around the premise that the best monetary polity that the Federal Reserve can follow is to establish a constant growth rate of the money come out independent of current economic fluctuations. The argumentation is that as the economy experiences changes in relative output, the money supply can have dramatic effects upon the economy. Additionally, by establishing a money growth rule, Friedman believed that this would come about the possibility of short-run mismanagement and, in the end, be more beneficial for the economy.The problem with balancing an economy is that human judgment and evaluation of economic situations grave into the equation. Establishing a constant growth level in the money supply would eliminate the decision making process of the central banker. The problem with human encumbrance is the short-sided nature of many of the policies designed to aid the economy. Such interventions, which yields unintended negative consequences, is the result of the time inconsistency problem. This problem is understood through situations during which central bankers stockpile monetary policy in a discretionary way and pursue expansionary policies that are attractive in the short-run, but lead to detrimental long-run outcomes. Friedman believes that by leaving money growth decisions to an individual, the results are poor long-run management and eventually high inflation rates, an obvious detriment to the economy.The idea of the money growth rule is contingent upon the relationship between the money supply and inflation. Therefore, the question arises whether there even is a relationship between money supply and inflation. As stated earlier, one can see a relation between money and inflation. Presented above is series data that displays this relati onship between money supply and the inflation rate everyplace the previous decades. The problem is that there are fluctuations within the data and therefore a broader definition of the money supply essential be utilized. Based on the research of Dr. Terry J. Fitzgerald, an economist at the Cleveland Federal Reserve Bank, if one defines money supply as M2, when examining the data over a multiple year progression, a pattern begins to present itself. Further, by graphing the difference between adjusted money growth and inflation, the link becomes evident. These graphs show the load that changes to the money supply can have upon an economys inflation rate.