Revisiting Friedman's Extended Monetary Framework. The Monetary Theory of Nominal Income

Olivo, Victor (2025): Revisiting Friedman's Extended Monetary Framework. The Monetary Theory of Nominal Income.

Abstract

This document revisits Milton Friedman's extended monetary framework, specifically focusing on his Monetary Theory of Nominal Income. Friedman’s extended monetary framework remains robust in explaining the dynamic relationship between money supply changes and nominal income fluctuations over more than 150 years of U.S. data. Despite major economic events, this relationship has been stable and significant. The empirical analysis with more recent data continues supporting Friedman's contention that money plays a special role in macroeconomic dynamics, stronger than fiscal variables or interest rates. The methodological debate between Friedman and his critics underscores the importance of empirical causality and practical explanatory power in economic theory. The document concludes that Friedman’s Marshallian approach offers valuable insights that have endured and continue to inform monetary economics.

• Item Type: MPRA Paper
• Language: English
• Keywords: Quantity Theory; Income-Expenditure Model; Price Level; Inflation; Nominal Income; Money Supply; Causality; Dynamic Models; Time Series Models.
• Subjects: E - Macroeconomics and Monetary Economics > E0 - General > E00 - General; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E51 - Money Supply ; Credit ; Money Multipliers; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy

References

1. Andersen, L. C., & Jordan, J. L. (1968). Monetary and fiscal actions: A test of their relative importance in economic stabilization. Federal Reserve Bank of St. Louis Review, 50(11), 11-24.

2. Batten, D. S., & Hafer, R. W. (1983). The relative impacts of monetary and fiscal actions on economic activity: A cross-country comparison. Federal Reserve Bank of St. Louis Review, 65(1), 5-20.

3. Bekaert, Geet, Seonghoon Cho, Moreno Antonio (2005). New-Keynesian macroeconomics and the term structure. NBER Working Paper Series. Working Paper 11340.

4. Bordo, Michael D., & Rockoff Hugh (2013). Not just the great contraction: Friedman and Schwartz’s a monetary history of the United States 1867 to 1960. NBER Working Paper No. 18828.

5. Enders, W. (2015). Applied econometric time series fourth edition. John Wiley & Sons.

6. Friedman, M. (1956). The quantity theory of money: A restatement. In M. Friedman (Ed.), Studies in the Quantity Theory of Money (pp. 3-21). University of Chicago Press.

7. Friedman, M. (1970). A theoretical framework for monetary analysis. Journal of Political Economy, 78(2), 193-238.

8. Friedman, M. (1971). A monetary theory of nominal income. Journal of Political Economy, 79(2), 323-337.

9. Friedman, M. (1974). Milton Friedman’s monetary framework: A debate with his critics. In R. J. Gordon (Ed.), Milton Friedman’s Monetary Framework: A Debate with His Critics (pp. 1-50). University of Chicago Press.

10. Friedman, M., & Schwartz, A. J. (1963). A monetary history of the United States, 1867-1960. Princeton University Press.

11. Friedman, M., & Schwartz, A. J. (1982). Monetary trends in the United States and the United Kingdom: Their relation to income, prices, and interest rates, 1867-1975. University of Chicago Press.

12. Hammond, Daniel J. (1996). Theory and measurement. Causality issues in Milton Friedman’s monetary economics. Cambridge University Press.

13. MacKinnon, J. G. (2010). Critical values for cointegration tests (No. 1227). Queen's Economics Department Working Paper.

14. Olivo, Víctor (2011). Tópicos avanzados de teoría y política monetaria. Editorial Arte Profesional.

15. Olivo, Victor (2023): Show me the money. Why neglecting money in monetary theory and policy is a bad idea. MPRA_paper_118993.

16. Pesaran, M. H. (2015). Time series and panel data econometrics. Oxford University Press.