Why is Price Stability the major goal of monetary policy?
Answer Dear Kent: What is “the” major goal of monetary policy? It depends on who you ask. If you ask Nobel laureate economist Milton Friedman, the dean of monetary policy, he’d say: “The rule that has most frequently been suggested by people of a generally liberal persuasion is a price level rule; namely, a legislative directive to the monetary authorities that they maintain a stable price level. I think that this is the wrong kind of a rule.” (“Capitalism and Freedom,” p.53) He goes on: “My choice at the moment would be a legislated rule instructing the monetary authority to achieve a specified rate of growth in the stock of money.” (ibid, p.54) Thus, Friedman favors increasing the money supply by a fixed percentage every year, regardless of the behavior of the price level. Other economists, such as Ludwig von Mises and Nobel laureate F.A. Hayek, argue for basing money on commodities such as gold that make it difficult for a country’s central bank to change the amount of money *at all
