Abstract

MILTON FRIEDMAN AND THE CASE FOR FLEXIBLE EXCHANGE RATES AND MONETARY RULES

Harris Dellas

University of Bern and Bank of Greece

George S. Tavlas

Bank of Greece and University of Leicester

Abstract

Milton  Friedman was a strong proponent of flexible exchange rates accompanied by a domestic monetary rule. He believed that such a combination would deliver superior economic performance and would also be more consistent with democratic principles than a regime based on fixed exchange rates and discretionary monetary policy. John Taylor’s recent proposal of a rules-based international monetary system –- based on flexible exchange rates and a Taylor rule for each country - is very much in that spirit and represents a modern rendition of Friedman’s views. Under both the Friedman and Taylor proposals, instead of policy coordination among countries there would be policy harmonization.

JEL-classifications: F02, F33, E52

Keywords: exchange rate systems, monetary rules, Taylor Rule.

Acknowledgements: Paper presented at the Cato Institute’s Annual Monetary Conference, Washington D.C., November 16, 2017. We thank Ed Nelson and Mike Ulan for their very helpful comments. The views expressed in this article are those of the authors and do not necessarily reflect those of the Bank of Greece. Any errors or omissions are the responsibility of the authors.

Correspondence:

George Tavlas

Bank of Greece

21 E Venizelos Ave

Athens, 10250, Greece

Tel. no. +30 210 320 2370

Fax. no. +30 210 320 2432

Email: gtavlas@bankofgreece.gr