Friedman's k-percent rule

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Friedman's k-percent rule is the monetarist proposal that the money supply should be increased by the central bank by a constant percentage rate every year, irrespective of business cycles. Milton Friedman coauthored a book with Anna Schwartz to summarise a historical analysis of monetary policy, called "Monetary History of the United States 1867-1960". The book attributed inflation to excess money supply generated by a central bank. It attributed deflationary spirals to the reverse effect of a failure of a central bank to support the money supply during a liquidity crunch. Friedman proposed a fixed monetary rule, called Friedman's k-percent rule, where the money supply would be calculated by known macroeconomic and financial factors, targeting a specific level or range of inflation.
Under this rule, there would be no leeway for the central reserve bank as money supply increases could be determined "by a computer" and business could anticipate all monetary policy decisions.^[1][2]

Contents

 [hide] 

• 1 Definition
• 2 Monetary policy
• 3 Rules vs. discretion in monetary policies
• 4 Modified k-percent rule
• 5 Criticisms
• 6 See also
• 7 References
• 8 Further reading

Definition[edit]

According to Friedman, "The stock of money [should be] increased at a fixed rate year-in and year-out without any variation in the rate of increase to meet cyclical needs" (Friedman, 1960). Friedman was of the view that the main policy to be avoided is countercyclical monetary policy, the standard Keynesian policy recommendation at the time. He believed giving governments any flexibility in setting money growth would lead to inflation and therefore, the central bank should follow a procyclical monetary policy and expand the money supply at a constant rate, equivalent to the rate of growth of real GDP.

Monetary policy[edit]

Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment.
Framing the monetary policy is a very complicated and difficult task as balance has to be maintained between different economic variables. A tradeoff usually has to be made between these economic variables. Policymakers often make use of monetary rules like Friedman's k-percent rule or the Taylor rule to design more effective monetary policies.

Rules vs. discretion in monetary policies[edit]

Many economists have argued whether using Rules in framing monetary policies is better than the discretion of the policy maker and vice versa. The rules vs. discretion debate was the mainstream argument of monetary policy framing in the 1960s to the 1980s and there is still no single opinion on what is better. However, some economists like John B. Taylor are inclined towards using rules rather than discretion. Taylor said, "You do not prevent bailouts by giving the government more power to intervene in a discretionary manner. You prevent bailouts by requiring adequate capital based on simple, enforceable rules and by making it possible for failing firms to go through bankruptcy without causing disruption to the financial system and the economy,"^{[citation needed]} indicating a clear preference over rules rather than discretion in monetary policies.
Economists and policy makers strive to formulate monetary policies using Rules but allowing scope for discretion so as to adjust the policies appropriate to the current economic situation so as to make these policies more effective.
The Friedman's k-percent rule, however, does not allow any interference from central banks in framing the monetary policy, as Friedman believed that discretion would be counterproductive and could lead to increased levels of inflation instead of controlling it. The K-percent rule does not allow any discretion in framing of monetary policies and believes in strict adherence to the proposed rule. This has caused many economists to criticise Freidmans k-percent rule.

Modified k-percent rule[edit]

Economists and policy makers have modified Friedman's k-percent rule and have developed more sophisticated rules for framing monetary policy, using the k-percent rule as a base. Joachim Scheide, head of the Forecasting Center at the Kiel Institute for the World Economy in Germany, has modified the k-percent rule to make it more applicable in context of Germany's economy. He uses three new variables "nominal domestic demand," "central bank money," and "error term with the standard characteristics" to give a more suitable model.
The k-percent rule is considered a no feedback rule, which does not allow central banks to alter monetary policy to adjust to current economic situations; thus, it is not effective in the short term.

Criticisms[edit]

No feedback is considered in this policy, as it believes in no interference of the central bank. It does not help in the short term and does not allow central banks to respond directly to immediate financial and economic turmoil.
This is not to be confused with the Friedman rule, which is a policy of zero nominal interest rates.

See also[edit]

• Taylor rule
• Monetary policy
• Inflation targeting
• McCallum rule
• Exchange Rate Targeting Rule

References[edit]

1. Jump up ^ Thomas Palley, "Milton Friedman: The Great Conservative Partison"
2. Jump up ^ Ip, Greg; Whitehouse, Mark (2006-11-17). "How Milton Friedman Changed Economics, Policy and Markets". The Wall Street Journal. 

• Friedman's Money Supply Rule vs. Optimal Interest Rate Policy
• Model Uncertainty and Delegation: A Case for Friedman's k-percent Money Growth Rule
• A K-Percent Rule for Monetary Policy in West Germany
• Rules, discretion and reputation in a model of monetary policy, Robert J. Barro, David B. Gordon
• Discretion versus policy rules in practice, John B. Taylor

Further reading[edit]

Milton Friedman (1960), A Program for Monetary Stability (New York: Fordham University Press).

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[show] v t e Milton Friedman Academic career Monetarism Friedman rule Friedman test Friedman's k-percent rule Friedman–Savage utility function Miracle of Chile Permanent income hypothesis Works Essays in Positive Economics (1953) Capitalism and Freedom (1962) A Monetary History of the United States (1963) Free to Choose (1980) Milton Friedman bibliography Family Rose Friedman (wife) David D. Friedman (son) Patri Friedman (grandson)

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Draft Manifesto: A direction for the reform of economics education

Friday, 4 April 2014

 

 

This draft manifesto is intended as a statement to provide a unifying direction for those groups campaigning for economics curriculum reform in universities across the world. Please show your support by signing your name and organisation below.

This manifesto is based on the Manchester Post-Crash petition and the Rethinking Economics CORE feedback.
Blogger Ref Link http://www.p2pfoundation.net/Transfinancial_Economics

Signed:

Rafe Martyn and Marco Schneebalg (University of Cambridge, Cambridge Society for Economic Pluralism)

Thomas Youngman and Hoang Nguyen (UCL, Better Economics Society)

Alex Andrade Martins (SOAS, Open Economics Forum)

Benolas Tippet, Katarzyna Buzanska & Franck Magennis (LSE, Post Crash Economics at LSE)

Yuan Yang and Diana Garcia Lopez (Rethinking Economics Organisers’ Hub)

Nicolò Fraccaroli and Mathia Achei (LUISS University Rome, Rethinking Economics Italia)

1. We believe students should be taught to think independently and critically. This involves a critical approach to particular models within each school of economics, as well as the whole methodological structures underlying different schools of economics.


2. We need to recognise the plurality within economics. In most courses “economics” is shorthand for “neoclassical economics”. There is no recognition of the variety of schools of thought within economics, across history or across the world. Academic integrity requires that alternative economic theories be introduced to students, alongside those currently taught. Economic questions cannot necessarily be answered adequately from a single theoretical standpoint, or solely from a mathematical approach.


3. Economics, as in the case of any other social sciences, cannot always be value-neutral. Therefore we demand that the philosophical, political and ethical underpinnings of different economic theories should be explicitly discussed during lectures and seminars. Economists need to remain critical of the ethical underpinnings and consequences of their theories.


4. Economics as it is taught currently is disconnected from real-world events and policies. In many departments, much of the curricula in the last few decades have slowly lost all mention of contemporary events or facts. This means that students are not being equipped to engage in real-world debates. We believe economics graduates should be prepared to consider and react to the economic problems that the world faces, because societies are shaped by economic events and policies, which are in turn shaped by people’s understandings of economics.


5. Economic theory needs to be presented alongside economic evidence. Real-world data should be used to spark discussions of how useful different theories are. Students should be able to weigh up theories against evidence, criticise the multiple uses of evidence, and understand why statistical methods are contestable. This includes debating what constitutes evidence, and conditions under which finding evidence may not be possible.


6. We believe a context-free economics is a misguided economics. Economic theories cannot be fully understood independently of the institutional, cultural and technological context in which they were formulated. Therefore, links to economic history and the history of economic thought should be made wherever possible. We should recognise that while some of today’s economic theories are a scientific “progression” from the past, many of them are just a different way of looking at society.


7. As well as recognising the strengths of our approaches, we should foster humility and self-awareness within economics. We need to specifically mention the limitations of our approaches, and recognise that there are a plurality of disciplines that study society which have insights to offer economics. Interdisciplinary dialogue is necessary for economics to grow. We must stop isolating ourselves from anthropology, sociology and political science when we have much to learn from them.

We want to stress that individual departments are not the cause of the problem. It is difficult for any individual economist or department to act independently of others. We need to take the lead by pushing for reform together, within and across countries.

Real Time Information may be a reform too far

Whitehall’s record does not fill us with confidence that a major IT reform to the PAYE system will be handled well

The Real Time Information (RTI) reform is intended to eliminate tax code errors and support Universal Credit by linking up the tax and benefit systems Photo: Alamy

By Telegraph View

8:50PM BST 03 Apr 2013

This Saturday will see the biggest overhaul to the Pay As You Earn (PAYE) system of income tax since its introduction nearly 70 years ago. Employers will no longer be able to wait until the end of the year before telling the taxman how much they have paid their staff, but must do so whenever a payment is made.

PAYE has gone largely unreformed since its introduction in 1944 by the wartime chancellor Sir Kingsley Wood, who dropped dead on the day it was announced in the House of Commons. The big assumption then, and for many years after, was that people would stay with the same employer for life. Today, people move jobs much more frequently and HMRC has found it increasingly hard to keep up with what they earn. So complicated has the coding become that around 1.4 million people were sent tax demands totalling £3.8 billion in 2010/11 that resulted from problems with the PAYE system.

The Real Time Information (RTI) reform is intended to prevent a repeat of that fiasco by eliminating tax code errors and, also, to support the introduction of the new Universal Credit by linking up the tax and benefit systems. HM Revenue & Customs (HMRC) claims that firms will save £300 million a year in administration costs. However, this is not the expectation of thousands of employers who need to invest in new payroll software or update their current systems. This may be straightforward enough for a big company, but it is a costly burden on a small business at a difficult economic time. Moreover, a survey this week suggested that one in five such companies is unprepared for the change and, in some cases, unaware it is even happening. They risk fines for incorrect or late returns.

Inevitably, with a measure of this magnitude there will be teething problems; but Whitehall’s record of IT project disasters does not fill us with confidence that this major reform will be handled well. Commendably, HMRC has shown some flexibility by allowing firms with fewer than 50 employees to file a PAYE return just once a month until October, after which they will be required to provide real time information on every payment made to an employee.

On October 6, Universal Credit will start; and it is hard not to conclude that this timetable is being dictated by unrealistic ministerial expectations and politically driven policy deadlines rather than by what works. RTI may turn out to be a benign reform, though, tellingly, no other advanced economy has tried it. But in the short term, it could damage small businesses just when their entrepreneurial zeal is needed most to create new jobs and revive the economy. Ministers have a duty to get it right.


http://www.telegraph.co.uk/comment/telegraph-view/9969574/PAYE-changes-Real-Time-Information-may-be-a-reform-too-far.html