Introduction

The second main stage in the development of orthodox monetarism involved the expectations-augmented Phillips curve analysis which was absorbed into monetarist analysis after the mid-to-late 1960s. Central to this phase is Friedman’s 1967 Presidential Address to the American Economic Association, subsequently published in 1968 in the American Economic Review as ‘The Role of Monetary Policy’. In this article (reprinted on pp. 164-79) Friedman denies the existence of a permanent/long-run trade-off between inflation and unemployment and introduces the natural rate of unemployment hypothesis. The essence of this hypothesis is a reaffirmation of the classical view that in the long run nominal magnitudes cannot determine real magnitudes such as employment and output. According to

Friedman monetary policy cannot, other than for very limited periods, achieve some target unemployment rate and any attempt to maintain unemployment below the natural rate will produce accelerating inflation; a prediction subsequently borne out by the experience of many western economies during the 1970s (see Snowdon and Vane 1997). In the conduct of monetary policy he prescribes that the authorities pursue a ‘stable’ rate of monetary growth in line with the trend/long-run growth rate of the economy to ensure long-run price stability. Friedman argues that the natural rate of unemployment can be reduced only by appropriate supply-side microorientated policies which improve the operation of the labour market. In 1981 Robert Gordon described Friedman’s 1968 paper as probably the most influential article written in macroeconomics in the previous twenty years. More recently James Tobin (1995), one of Friedman’s most eloquent, effective and long-standing critics, has described the paper as ‘very likely the most influential article ever published in an economics journal’ (emphasis added).