Does ECB’s monetary policy framework fit with Friedman ideology?

ECB is one of the few central banks which still believes in Friedman’s main idea- changes in money supply leads to inflation. ECB’s policies are  based on two pillars – economic and monetary. Most central banks have stopped looking at money supply a while back. Though they are being criticised for ignoring monetary flows  post-crisis.

Stephen Hall, P.A.V.B. Swamy, and George Tavlas explore ECB’s monetary policy based on principles cited by Friedman:

The European Central Bank (ECB) assigns greater weight to the role of money in its monetary policy strategy than most, if not all, other major central banks. Nevertheless, reflecting the view that the demand for money became unstable in the early 2000s, some commentators have reported that the ECB has “downgraded” the role of money demand functions in its strategy. This paper explains the ECB’s monetary policy strategy and shows the considerable influence of Milton Friedman’s contributions on the formulation of that strategy. The paper also provides new evidence on the stability of euro area money demand. Following a conjecture made by Friedman (1956), the authors assign a role to uncer- tainty in the money demand function. They find that although uncertainty is nonstationary and subject to wide swings, it is nonetheless mean reverting and has substantial effects on the demand for money.

Nice paper. One gets to see learn both the concepts – Friedman’s views on mon pol and how/whether ECB is following them. Page 7 has a nice summary of the broad ideas..

 

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