Question

List pros and cons of the constant money growth rate rule.

Answer 1

Milton Friedman argued that the best monetary policy was for the central Bank to increase the money supply at a constant growth rate. They believed that there are long and variable lags for the monetary policy and political pressure on the central bankers, the monetary policies were likely to have both desirable and undesirable effects on the economy. Also, in the long run it would match the growth rate of the economy and thus will be correct in the long run. It will also help in giving less discretion to the Central Bank to conduct monetary policy and thus will prevent instability and uncertainty.However, the policy has some disadvantages as it maintains a constant growth rate and the cases in which growth rate has to be changed in an unpredictable manner or in a different percentage as fixed in constant money growth then it becomes difficult to implement the constant growth of money rule.