Friedman's Theoretical Framework

Milton Friedman's contention that the crucial theoretical difference between Keynesians and monetarists is that Keynesians assume rigid prices is shown to be factually and logically wrong. Distinctively monetarist propositions and prescriptions depend not on price flexibility but on the assumed insensitivity of monetary velocity to interest rates. To avoid this assumption, Friedman's second "monetary theory of nominal income" takes interest rates as exogenous in the short run; but the model has strange inconsistencies and implications. Finally, Friedman's longrun quantity theory propositions are shown to apply only to economies where money is the sole exogenous nominal magnitude.