Simple Rule - Stable Monetary Growth Path

2023-08-11
Summary:

The simple rule method is a currency control method, and Friedman et al. advocate using a fixed-rate supply of money to maintain stable economic growth and avoid making incorrect decisions due to decision-maker limitations.

What is the Simple Rules Method?

The simple rule method is one of the methods of currency control. It means that as long as the monetary management authority supplies money at a fixed rate, it can maintain stable economic growth. Its main creators are Professor Friedman and other new currency advocates. Friedman believes that if each situation is considered based on its own situation, then in most cases, wrong decisions may be made. Because decision-makers only conduct inspections within a limited scope without taking into account the comprehensive consequences of policies,

On the other hand, if we adopt a general approach to a combination of situations, then the existence of rules itself will have a beneficial impact on people's attitudes, beliefs, and hopes, which cannot be considered even when adopting identical policies for a series of individual situations.


Factors affecting the simple rule method

1. In advanced capitalist countries, under the generally allowable level of unemployment, the national economy has inherent stability. Only when disturbed by incorrect monetary policies can the internal stability of the national economy be disrupted. This indicates that they are opposite the Keynesians. It is believed that most of the situations that cause national economic disorder do not come from the physical sector but from the monetary sector, which is caused by excessive currency.


2. There are many uncertain factors in the formulation of economic policies. Economic policymakers have several means at their disposal. They generally have a relatively correct understanding of the direction in which each means will drive economic operation. Unfortunately, they cannot accurately predict the magnitude and timing of the effectiveness of their policies.


Even assuming they can do so, external developments will always lead to unexpected results. There are roughly four sources of these uncertain factors:

(1) People's knowledge of currency and economy is limited, coupled with incomplete information and low accuracy, and the calculation methods are not very modern. The number of forecasting personnel is not enough to match the quality department. This makes it impossible for people to comprehensively and accurately evaluate the current state of the economy.


(2) People's predictions about the specific exogenous variables that impact the economy and the extent to which each variable will affect the economy are inevitably inaccurate.


(3) The different opinions of different economists on the same economic problem and the different views of the same economist on the same economic problem at different times make people feel at a loss about these issues.


(4) There is a time difference in the effectiveness of monetary policy. This type of time difference can be divided into various types, including recognition time difference, decision time difference, and effect time difference. People's understanding of the length and changes of these time differences is not sufficient.


3. The goals pursued by monetary policy in today's capitalist countries are mostly multiple, including stabilizing the currency, full employment, economic growth, and balancing international payments. These goals conflict with each other, and it is difficult for the same monetary policy to achieve two or more goals simultaneously.


4. Leaving the issue of money supply to the monetary management authorities or even the government for discretionary decision-making and consideration is not in line with the standards of self-governing society but also susceptible to political and economic pressure. Due to changes in government and monetary authorities, it is also easy to cause chaos and lead to "unfortunate consequences". Moreover, discretionary decision-making is also influenced by purposes other than stabilizing the economy and those that contradict it. Even after knowing its mistakes, it often turns a blind eye and does not correct them. In this way, making discretionary decisions on the money supply not only fails to achieve the expected results but also becomes an important cause of economic turbulence.


Based on the above considerations, Friedman and others strongly oppose the use of contingency methods to determine the money supply and strongly advocate for the legislative body to formulate rules and order the monetary authorities to increase the amount of money in a specific proportion. The main content of this rule is to choose an appropriate percentage of currency growth. Friedman has conducted long-term research on this topic, titled "Optimal Currency Quantity". In the article "The Monetary Stability Case," published in 1960, he believed that in the past 90 years in the United States, an annual growth rate of 4-5% was more appropriate for the amount of money. Among these 4-5%, a growth rate of about 3% is equivalent to the growth rate of production, and the remaining 1-2% is equivalent to the growth of population and the increase in the amount of money that the public wants to keep with the increase in actual income.


Disclaimer: Investment involves risk. The content of this article is not an investment advice and does not constitute any offer or solicitation to offer or recommendation of any investment product.

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