In tomorrow’s Wall Street Journal there is a symposium on monetary policy in which Richard Fisher, Rick Mishkin, Vince Reinhart, Allan Meltzer, Ron McKinnon and I participate. One of the points I make in my piece is that another massive dose of quantitative easing is not appropriate now. I briefly explained the rationale for this point of view in a post on this blog several days ago, where I referred to Milton Friedman’s advocacy of stable monetary policy rules. A number of people wrote to ask me about that post, and Scott Sumner has written a thoughtful blog entry about it, quoting Milton Friedman on Japan.
I completely agree that the problems in Japan in the 1990s stemmed from a sharp decline in money growth compared with the 1980s, from 8.9 percent per year during 1980.1–1991.4 to 2.6 percent per year during 1992.1 – 2000.1 as shown in the Table and Chart in this speech I gave at the Bank of Japan. This decline in money growth was a discretionary action which Friedman, Allan Meltzer, and others rightly criticized. This criticism is quite consistent with Friedman’s view that we should avoid large discretionary changes in money growth and instead follow a constant money growth rule. To correct this mistake of a sharp decline in money growth, Friedman recommended that the Bank of Japan increase money growth but “without again overdoing it,” presumably taking money growth back to the more appropriate levels of the 1980s.