In 2000 Milton Friedman gave a keynote address to the Bank of Canada, which is available for download here [PDF]. The keynote itself is interesting, but moreso are his responses to a Q&A session, where he talks about issues such as the future euro and monetary policy at the zero lower bound. Here, without commentary, are some hilights:
Michael Bordo: Do you think the recent introduction of the euro will lead to the formation of other common-currency areas?
Milton Friedman: [SNIP] I think the euro is in its honeymoon phase. I hope it succeeds, but I have very low expectations for it. I think that differences are going to accumulate among the various countries and that non-synchronous shocks are going to affect them. Right now, Ireland is a very different state; it needs a very different monetary policy from that of Spain or Italy.
[SNIP] You know, the various countries in the euro are not a natural currency trading group. They are not a currency area. There is very little mobility of people among the countries. They have extensive controls and regulations and rules, and so they need some kind of an adjustment mechanism to adjust to asynchronous shocks—and the ﬂoating exchange rate gave them one. They have no mechanism now.
If we look back at recent history, they’ve tried in the past to have rigid exchange rates, and each time it has broken down. 1992, 1993, you had the crises. Before that, Europe had the snake, and then it broke down into something else. So the verdict isn’t in on the euro. It’s only a year old. Give it time to develop its troubles.
On inflation targeting:
Malcolm Knight: Countries with a ﬂexible exchange rate need a nominal target for monetary policy to anchor expectations. Do you feel that inﬂation targeting provides a useful nominal target?
Milton Friedman: As I mentioned earlier, I think it’s a good thing to have a nominal target, to say that you’re not going to try to ﬁne-tune, and to indicate what you aren’t going to do. The problem I have is this: the current mechanism for all of the central banks who are inﬂation targeting is a short term interest rate—as in the United States—in all of the central banks.
We know from the past that interest rates can be a very deceptive indicator of the state of affairs. A low interest rate may be a sign of an expansive monetary policy or of an earlier restrictive policy. And similarly, a high rate may be a sign of restriction, of trying to hold things down; or it may be asign of past inﬂation.
The 1970s offer the classical illustration in which there were high interest rates that were reﬂecting the Fisher effect of inﬂation expectations. So I’m a little leery of operating primarily, or almost primarily, via interest rates. But, I think that having a given inﬂation target is a good objective. The question is, how long will you be able to keep it?
Finally, on monetary policy at the zero lower bound:
David Laidler: Many commentators are claiming that, in Japan, with short interest rates essentially at zero, monetary policy is as expansionary as it can get, but has had no stimulative effect on the economy. Do you have a view on this issue?
Milton Friedman: Yes, indeed. As far as Japan is concerned, the situation is very clear. And it’s a good example. I’m glad you brought it up, because it shows how unreliable interest rates can be as an indicator of appropriate monetary policy.The Japanese bank has supposedly had, until very recently, a zero interestrate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy. Essentially, you had deﬂation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity.
During the 1970s, you had the bubble period. Monetary growth was very high. There was a so-called speculative bubble in the stock market.In 1989, the Bank of Japan stepped on the brakes very hard and brought money supply down to negative rates for a while. The stock market broke. The economy went into a recession, and it’s been in a state of quasi-recession ever since. Monetary growth has been too low. Now, the Bank ofJapan’s argument is, “Oh well, we’ve got the interest rate down to zero; what more can we do?”
It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.