Question

Compare and contrast the market monetarist 5-percent target for nominal GDP growth with the older, simpler monetary rule advocated by Milton Friedman.

Short answer

The market monetarist’s 5% target for nominal GDP growth is based on the prediction market always predicting 5% growth. In contrast, the simpler monetary rule advocates the expansion of the money supply annually at a steady rate in general and not based on the prediction market.

Step-by-step solution

Market monetarist’s 5% target

As per the market monetarist’s 5% target for nominal GDP growth, the Fed’s goal would be for the prediction market to always be predicting 5% growth in nominal GDP. If the prediction ever deviated from that 5% target, the Fed would loosen or tighten monetary policy in whatever direction would be needed for the prediction to adjust back to 5%.

Monetary rule 

Milton Freidman advocated the monetary rule that the Fed should expand the money supply each year at the same annual rate as the typical growth of the economy’s production capacity. The Fed’s sole monetary role would be to use its tools (open-market operations, the discount rate, interest on reserves, and reserve requirements) to ensure that the nation’s money supply grew steadily by, say, 3–5% a year.