Friedman's k-percent rule

Friedman's k-percent rule is the monetarist proposal that the money supply should be increased by the central bank by a constant percentage rate every year, irrespective of business cycles. Milton Friedman coauthored a book with Anna Schwartz to summarise a historical analysis of monetary policy, called A Monetary History of the United States, 1867–1960. The book attributed inflation to excess money supply generated by a central bank. It attributed deflationary spirals to the reverse effect of a failure of a central bank to support the money supply during a liquidity crunch. Friedman proposed a fixed monetary rule, called Friedman's k-percent rule, where the money supply would be calculated by known macroeconomic and financial factors, targeting a specific level or range of inflation.

Under this rule, there would be no leeway for the central reserve bank, as money supply increases could be determined "by a computer" and therefore business could anticipate all monetary policy decisions.

According to Friedman, "The stock of money [should be] increased at a fixed rate year-in and year-out without any variation in the rate of increase to meet cyclical needs" (Friedman, 1960). Friedman was of the view that the main policy to be avoided is countercyclical monetary policy, the standard Keynesian policy recommendation at the time. He believed giving governments any flexibility in setting money growth would lead to inflation and therefore, the central bank should follow an acyclical monetary policy and expand the money supply at a constant rate, equivalent to the rate of growth of real GDP.

Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment.

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