- Elgar original reference
Edited by Philip Arestis and Malcolm Sawyer
Chapter 14: Monetary Policy
James Forder The Phillips curve and Friedman’s proposal It is diﬃcult not to be struck by the high proportion of economists who assent to the doctrine of the neutrality of money. Just as notable, perhaps, although much less often noted, is the degree of agreement on a picture of how – as a result of what came to be called ‘the monetarist counter-revolution’ – that consensus emerged. This picture is not only routinely presented in textbooks, but can also be found to underlie numerous policy statements, to motivate institutional design, and even to be assumed in political memoirs. And indeed, in certain important respects, it might be more important in shaping today’s policymaking environment than the doctrine of ‘the classical dichotomy’ itself. In the form in which they have been accepted, these things were most clearly popularized in Friedman’s (1977) Nobel Lecture. He attributed the deterioration in performance before then to a mistaken belief among policymakers that there existed an exploitable tradeoﬀ between inﬂation and unemployment in the manner superﬁcially suggested by the work of Phillips (1958). Friedman’s view was that as policymakers acted on this idea and raised inﬂation, unemployment fell temporarily, but only so long as the inﬂation was unanticipated or its eﬀects misunderstood by wage bargainers. In the longer term, unemployment would return to its ‘natural rate’, but with inﬂation at a higher level. From there policymakers could still lower unemployment, but only with even greater inﬂation so that the additional...
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