The Friedman rule in today’s perspective

Reich, Jens (2017): The Friedman rule in today’s perspective.

Abstract

Central banks like the Bank of England or the Bundesbank have highlighted recently that the supply of currency is achieved not by means of printing and spending but by means of credit. This clarification raises further issues. This article addresses the issue of seigniorage and optimal inflation. So far approaches to seigniorage and optimal inflation are still based on the assumption of a currency which is printed and spend by a central authority. From this perspective central banks’ inflation targets and optimal inflation targets are at odds with those suggested by economic theory. The so-called Friedman-rule, the common core of optimal inflation theory, determines optimal inflation via the (opportunity) cost of producing currency. This basic approach is amended by “external effects”, e.g. the impact of monetary non-neutrality or wage rigidities and so on. However, even under consideration of external effects there remains a significant gap between actual inflation targets and optimal rates as suggested by theory. The supply by means of credit, however, involves “costs of production” which do not appear in Friedman’s case: losses from borrower defaults. Incorporating expected losses into economic theory contributes significantly in aligning central banks’ optima with economic theory and provides a new theory of seigniorage for a credit currency.

• Item Type: MPRA Paper
• Language: English
• Keywords: Optimal inflation, seigniorage, monetary policy, central banking.
• Subjects: 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; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies

References

Arestis, Philip and Malcolm Sawyer (2008): Handbook of Alternative Monetary Economics, Cheltenham: Edward Elgar.

Bank of Canada (2010): “Seigniorage”, in: Backgrounders, March 2010, online: 29.12.2016: http://www.bankofcanada.ca/wp-content/uploads/2010/11/seigniorage.pdf

Bank of England (2014): Quarterly Bulletin, Q1, London.

Bernanke, Ben S. (2004): “Panel Discussion: Inflation Targeting”, in: Federal Reserve Bank of St. Louis, Review, Vol. 86(4), pp. 165-168.

Binswanger, Hans C. (2013): The Growth Spiral – Money, Energy, and Imagination in the Dynamics of the Market Process, Berlin-Heidelberg: Springer.

Black, Fischer S. (1987): Business Cycles and Equilibrium, New York: Basil Blackwell.

Blanchard, Olivier, Giovanni Dell’Ariccia, and Paolo Mauro (2010): “Rethinking Macroeconomic Policy,” in: IMF Staff Position Note SPN/10/03, online 31.12.2016: https://www.imf.org/external/pubs/ft/spn/2010/spn1003.pdf

Bundesbank (2010): Geld und Geldpolitik, online 13.9.2011: http://www.bundesbank.de/download/bildung/geld_sec2/geld2_03.pdf.

Bundesbank (2017): Monthly Bulletin, April, Frankfurt.

Central Bank News (2016): Inflation Targets Table for 2016, online 02.01.2017: http://www.centralbanknews.info/p/inflation-targets.html

Coenen, Günter, Athanasios Orphanides, and Volker Wieland (2004): “Price Sta¬bility and Monetary Policy Effectiveness When Nominal Interest Rates are Bounded at Zero,” in: Advances in Macroeconomics, Vol. 4 (1).

Davidson, Paul (1972): Money and the Real World, Edinburgh: R.&R. Clark LTD.

European Central Bank (2011): The monetary policy of the ECB, Frankfurt: European Central Bank.

Friedman, Milton (1969): The optimum quantity of money and other essays, London: Macmillan.

Gebauer, Wolfgang (2004): Geld und Währung, Frankfurt: Bankakademie Verlag.

Goodhart, Charles A. E. (1989): The central bank and the financial system, Basingstoke: Macmillan.

Gros, Daniel (1989): “Seigniorage in the EC: The implications of the EMS and Financial Market Integration”, in: IMF Working Paper, No. 89/71.

Gros, Daniel (1990): “Seigniorage and EMS Discipline”, in: De Grauwe, P. and Papademos, L. (eds): The European Monetary System in the 1990s, New York: Longman, pp. 162–181.

Gros, Daniel (1996): “Seigniorage and EMU: The Fiscal Implications of Price Stability and Financial Market Integration”, in: Peter Bofinger and Karl-Heinz Ketterer (eds): Neuere Entwicklungen in der Geldtheorie und Geldpolitik, Tübingen: J.C.B. Mohr.

Gros, Daniel (1998): “Distributing Seigniorage under EMU”, in: ifo Schnelldienst, Vol. 17-18, pp. 29–39.

Hahn, L. Albert (1930): Volkswirtschaftliche Theorie des Bankkredits, third ed., Tübingen: J.C.B. Mohr.

Hawtrey, Ralph (1962): The Art of Central Banking, New York: Augustus M. Kelly.

Issing, Otmar (2011): Einführung in die Geldtheorie, München: Franz Vahlen.

Keynes, John M. (1930 [1971]): A Treatise on Money – The Applied Theory of Money, Collected Writings, Fifth Volume, London: Macmillan.

Klopfleisch, Roland (2000): Fiskalische Konsequenzen der Europäischen Währungsunion, Frankfurt: Peter Lang.

Krugman, Paul R. (1997): The Age of Diminished Expectations: US Economic Policy in the 1990s, Cambridge: MIT Press.

Lange, Carsten (1995): Seigniorage, Berlin: Duncker & Humblot.

Lavoie, Marc and Wynne Godley (2012): Monetary Economics, New York: Palgrave Macmillan.

Moore, Basil J. (1991): “Money Supply Endogeneity: 'Reserve Price Setting' or 'Reserve Quantity Setting'?”, in: Journal of Post Keynesian Economics, Vol. 13 (3), pp. 404–413.

Nautz, Dieter (2000): Die Geldmarktsteuerung der Europäischen Zentralbank und das Geldangebot der Banken, Heidelberg: Physica.

Neumann, Manfred, J. M. (1992): “What the U.S. Government Makes on Money Production”, in: Federal Reserve Bank of St. Louis Review, March/April, pp. 32–40.

Neumann, Manfred J. M. (1996): “A comparative Study of Seigniorage: Japan and Germany”, in: BOJ Monetary and Economic Studies, Vol. 14 (1), pp. 104–142.

Phelps, Edmund S. (1973): “Inflation in the Theory of Public Finance”, in: Swedish Journal of Economics, Vol. 75, pp. 867–882.

Reich, Jens (2017): Seigniorage – On the Revenues from the Creation of Money, Cham: Springer Nature.

Reifschneider, David and John C. Williams (2000): “Three Lessons for Monetary Policy in a Low-Inflation Era,” in: Journal of Money, Credit, and Banking, Vol. 32 (4), pp. 936-66.

Rogoff, Kenneth (2013): “Inflation is Still the Lesser Evil”, Project Syndicate, June 6th, online 31.12.2016: https://www.project-syndicate.org/commentary/the-benefits-of-higher-inflation-by-kenneth-rogoff?barrier=accessreg Rösl, Gerhard (2002): Seigniorage in der EWU, Frankfurt: Peter Lang.

Schmitt-Grohe, Stephanie and Martin Uribe (2011): “The Optimal Rate Of Inflation”, in: Benjamin M. Friedman and Michael Woodford (eds): Handbook of Monetary Economics, Volume 3, North-Holland: Elsevier, pp. 653-722.

Siklos, Pierre L. (2008): “Inflation Targeting around the World”, in: Emerging Markets Finance & Trade, Vol. 44 (6), Special Issue on Inflation Targeting Around the Globe: The Experience of Advanced and Emerging Market Economics, pp. 17-37.

Sinn, Hans-Werner and Holger Feist (2000): “Der Euro und der Geldschöpfungsgewinn”, in: ifo Schnelldienst, Vol. 31, pp. 14–22.

Weidman, Jens (2015): Euro-Krise und kein Ende, Speech at Industry Summit in Gütersloh, November 23rd, online 01.01.2017: http://www.bundesbank.de/Redaktion/DE/Reden/2015/2015_09_23_weidmann.html

Weidmann, Jens and Katrin Weschen (1995): “Central Bank Independence and Seigniorage”, in: Discussion Paper Rheinische Friedrich-Wilhelms-Universität Bonn, Vol. B-307.

Woodford, Michael (2003): Interest and Prices, Princeton: Princeton University Press.

Yellen, Janet L. (2015): Inflation Dynamics and Monetary Policy, Speech at the Philip Gamble Memorial Lecture, University of Massachusetts, Amherst, Amherst, Massachusetts, September 24th, online 31.12.2017: https://www.federalreserve.gov/newsevents/speech/yellen20150924a.htm