» » Solow On Friedman's 1968 Presidential Address Too The Medium Run

Solow On Friedman's 1968 Presidential Address Too The Medium Run

Fifty years agone inward 1968, Milton Friedman's Presidential Address to the American Economic Association laid the phase for battles inward macroeconomics that induce got continued ever since. The legacy of the verbalize has been of import plenty that inward the Winter 2018 number of the Journal of Economic Perspectives, where I piece of work equally Managing Editor, nosotros published a three-paper symposium on "Friedman's Natural Rate Hypothesis After 50 Years."
Likewise, the Review of Keynesian Economics has committed right away most of its Oct 2018 number to a nine-paper symposium on the issues raised past times Friedman's presidential address. The showtime 2 papers inward the issue, past times Robert Solow as well as Robert J. Gordon, are freely available on-line, with the residuum of the number requiring a library subscription. Here, I'll focus mainly on Solow's comments.

What was the key insight or declaration inward Friedman's 1968 address? Friedman offers a reminder that involvement rates as well as unemployment rates are laid past times economical forces. Friedman uses this thought to laid upward a distinction betwixt the long-run as well as the short-run. In the curt run, it is possible for a fundamental banking firm similar the Federal Reserve to influence involvement rates as well as the unemployment rate. In the long run, in that location is a "natural" charge per unit of measurement of involvement as well as a "natural" charge per unit of measurement of unemployment which is trying to emerge, gradually, over fourth dimension from all the diverse forces inward the economy

This short-run, long-run distinction as well as then led to differing views over the appropriate role of authorities macroeocnomic policy. In the magisterial Monetary History of the United States that Friedman had published inward 1963 with Anna J. Schwartz, they brand a powerful instance that the final result of monetary policy inward the past times had oftentimes been to brand the macroeconomic province of affairs worse, rather than better. Given the practical imperfections faced past times monetary policy (including fourth dimension lags as well as political biases inward the the policy response as well as the long as well as variable lags inward how monetary policy affects macroeconomic variables),  Friedman argued that the “first as well as most of import lesson” is that “monetary policy tin forestall coin itself from existence a major beginning of economical disturbance.” While Friedman was opened upward to the thought of macroeconomic policy responding to extreme economical situations, he worried close policy mistakes as well as overreactions.

One touchstone counterargument was that monetary policy as well as the macroeconomy had go much improve understood over time, cheers inward constituent to Friedman's work. Thus, representative of past times misguided policy should non immobilize fundamental bankers thinking close time to come policy choices.

Robert Solow is a notable role musician inward these disputes: inward particular, inward his 1960 newspaper with Paul Samuelson, "Analytical Aspects of Anti-Inflation Policy" (American Economic Review, 50:2, pp. 177-194). In an essay inward the Winter 2000 number of the Journal of Economic Perspectives, "Toward a Macroeconomics of the Medium Run,"  Solow addressed this interrogation of thinking close macroeconomic policy inward the short- as well as the long-run. He wrote:
I tin easily imagine that in that location is a “true” macrodynamics, valid at every fourth dimension scale. But it is fearfully complicated, as well as nobody has a real practiced travelling pocket on it. At curt fourth dimension scales, I think, something sort of “Keynesian” is a practiced approximation, as well as for sure improve than anything direct “neoclassical.” At real long fourth dimension scales, the interesting questions are best studied inward a neoclassical framework, as well as attending to the Keynesian side of things would hold upward a tiddler distraction. At the five-to-ten-year fourth dimension scale, nosotros induce got to slice things together equally best nosotros can, as well as await for a hybrid model that volition create the job.
In this most recent essay, "A Theory is a Sometime Thing," Solow pushes this thought of medium-run thinking harder. He acknowledges that if a fundamental banking firm tin exclusively movement the involvement charge per unit of measurement as well as unemployment charge per unit of measurement to shift for a twelvemonth or two, inward the short-run before a rebound to what is determined inward the long run, as well as then when problems of lags inward timing are included, macroeconomic policy mightiness hold upward dysfunctional. But if a fundamental banking firm tin behave upon the involvement charge per unit of measurement as well as the unemployment charge per unit of measurement for a medium-run current of, say 5-7 years, as well as then fifty-fifty with some doubtfulness as well as lags, macroeocnomic policy may hold upward quite relevant as well as possible. At i point, Solow writes: "The medium run is where nosotros live."
On the number of involvement rates, Solow points out inward the belatedly 1970s as well as early on 1980s, Paul Volcker's actions pushed upward involvement existent involvement rates substantially, such that the existent federal funds involvement charge per unit of measurement "rose sharply to close 5 percent as well as fluctuated some that grade for the side past times side 6 years ...This sustained 5 pct indicate increase inward the existent funds charge per unit of measurement was non a random event. It was a deliberate intervention, designed to terminate the ‘double-digit’ inflation of the early on 1970s, as well as it did so, with existent side-effects. ... So the Fed was inward fact able to command (‘peg’) its existent policy rate, non for a twelvemonth or 2 but for at to the lowest degree 6 years, certainly long plenty for the normal deportment of counter-cyclical monetary policy to hold upward effective. 
The history of the Bernanke/Yellen Fed is to a greater extent than complicated ..... The Fed was manifestly able to lower the existent ten-year Treasury bond charge per unit of measurement for one-half a dozen years, 2011–2016. Of course of didactics in that location are many influences on the existent long involvement rate; it is at to the lowest degree plausible that large Fed purchases contributed to the outcome that the Fed was consciously seeking. The departure betwixt ‘a twelvemonth or two’ as well as ‘half a dozen years’ is non a pocket-sized matter.
What close the natural charge per unit of measurement of unemployment? One implication of Friedman's arguments was that if the authorities used macroeconomic policy inward an assay to jibe the unemployment charge per unit of measurement below it's natural charge per unit of measurement inward the long-run, it would atomic number 82 to surges of ever-higher inflation. As Solow notes, inward the 1970s as well as early on 1980s, abrupt drops inward the unemployment charge per unit of measurement create appear associated with rising inflation. But the primary storey close inflation inward the terminal 20-25 years is that it doesn't appear to react to much: it doesn't instruct a lot higher or a lot lower equally the unemployment charge per unit of measurement rises as well as falls. Solow goes hence far equally to claim: "[T]there is no well-defined natural charge per unit of measurement of unemployment, either statistically or conceptually."

For a to a greater extent than positive gloss on the legacy of Friedman's declaration as well as its applications to modern macroconomics, I commend your attending to the JEP articles listed above. Here, Solow ends  his Federal Reserve annotation with the sort of elegant rhetorical flourish that he brings to hence much of his writing:
"A few major failures similar those I induce got registered inward this Federal Reserve annotation may non hold upward plenty for a considered rejection of Friedman's doctrine as well as its diverse successors. But they are certainly plenty to justify intense skepticism, specially alongside economists, for whom skepticism should hold upward the default mental setting anyway. So why did those grand ships canvass for hence long, why did those ideas float for hence long, without much resistance? I don't induce got a settled answer.
One tin speculate. Maybe a patchwork of ideas similar eclectic American Keynesianism, held together partly past times duct tape, is e'er at a disadvantage compared with a monolithic doctrine that has an reply for everything, as well as the same reply for everything. Maybe that same monolithic doctrine reinforced as well as was reinforced past times the full general shift of political as well as social preferences to the correct that was taking house at close the same time. Maybe this chip of intellectual history was mainly an accidental concatenation of events, personalities, as well as dispositions. And perhaps this is the sort of interrogation that is improve discussed piece toasting marshmallows some a dying campfire."
Here's a Table of Contents for the relevant papers inward the Oct 2018 number of the Review of Keynesian Economics:
Along with the JEP papers mentioned earlier, those interested inward the bailiwick may also desire to consult the newspaper by Edward Nelson, “Seven Fallacies Concerning Milton Friedman’s `The Role of Monetary Policy,'" *Finance as well as Economics Discussion Series 2018-013, Board of Governors of the Federal Reserve System,

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