The Mercatus Center has just published a new symposium looking at how Milton Friedman might have reacted to recent monetary policy issues.  Here is a list of the papers:


Beckworth, David. “What Would Milton Friedman Say about Financial Stability?” April 2022.

Hendrickson, Joshua. “What Would Milton Friedman Say about the Coordination of Monetary and Fiscal Policy?” April 2022.

Horan, Patrick. “What Would Milton Friedman Say about the Fed’s New Framework?” April 2022.

Ireland, Peter. “What Would Milton Friedman Say about the Recent Surge in Money Growth?” April 2022.

Probst, Julius. “What Would Milton Friedman Say about Business Cycles? The Plucking Model View.” April 2022

Sumner, Scott. “What Would Milton Friedman Say about Market Monetarism?” April 2022.

In his paper, Julius Probst discusses Friedman’s view of what’s called the “plucking model” of the business cycle:

A building block of modern macroeconomic theory is that economic activity tends to bounce around above and below the sustainable speed limit of the economy. This understanding of a symmetric business cycle, where the economy moves around the so-called natural rate of output and unemployment, drives decision-making in many central banks today.

An alternative view of the business cycle is Milton Friedman’s plucking model. It sees the economy following the natural rate of output and unemployment during normal times and deviating only during recessions—that is, economic activity can only weaken below its full potential. There are no artificial booms but only shortfalls from full employment and natural output. Recent history and much empirical evidence increasingly favors the plucking model over the standard macroeconomic view. The plucking model also has huge implications for macroeconomic risk management and macroeconomic policy. It suggests that we need to aggressively counter recessions and minimize shortfalls from potential output, especially if there are scarring effects (known as hysteresis) that damage the economy’s capacity to produce goods and services in the long run.

My own view is somewhere in between the standard symmetric business cycle model and the plucking model.  I believe that the business cycle is highly asymmetric, with output falling sharply below potential during recessions and rising only slightly above potential during booms.  But I would not go so far as to claim there is no such thing as output above potential.

Although the plucking model and the natural rate model are often seen as being in conflict, I believe that both are useful models, both are useful approximations of reality.

Should the Fed “aggressively counter recessions”?  That depends.  A stimulative policy is often appropriate during recessions, but that’s not because the Fed should be targeting employment or output, rather because aggressively countering NGDP shortfalls would often have the additional effect of aggressively countering recessions.

But not always.  In 1970, 1974, 1980, and 1982, the US experienced recessions that coincided with reasonable NGDP growth.  The Fed should not have aggressively countered those recessions, and instead should have maintained 5% NGDP growth—even if it made the recession worse.