Friedman as a critic of Keynesian economics

Source: EconLog
by Scott Sumner

“While Friedman did accept that monetary policy had an effect on interest rates, and that this could impact the broader economy, it’s also undeniable that he was often quite critical of the interest rate approach to monetary policy used by Keynesian economists. Keynesians argue that an expansion in the money supply will reduce interest rates, which boosts aggregate demand. Friedman argued that an increase in the money supply would boost aggregate demand, and interest rates might rise or fall depending on the relative strength of the liquidity, income and Fisher effects. The extra money would directly push rates lower, but if the policy led to faster growth in real income or inflation, this would tend to push nominal interest rates higher. The overall effect was ambiguous, especially after a few months or years.” (06/08/21)