ABSTRACT
Although on scrutiny Friedman’s Address turns out to be a muddy text (De Vroey 2001b), it exerted a tremendous influence, paving the way for the eventual demise of Keynesian macroeconomics.2 Its purpose was to attack the view that the downwards-sloping character of the Phillips curve allowed for using monetary policy in order to decrease unemployment at the expense of some increase in inflation. It was also an attempt to defend the classical sub-model of the IS-LM model. Contrary to subsequent new classical economists, Friedman raised no objections of principle against the IS-LM model – at the least, he was ready to discuss his views within its framework.3 However, he considered that only its classical regime was valid, rejecting the Keynesian regime on the grounds of its ad hoc wage rigidity assumption. The hallmark of the classical regime was that monetary expansion exerted only nominal effects. The problem confronting Friedman was that the real world seemed to be on the side of Keynesians since casual observation suggested that monetary expansion led to real effects, what in turn suggested that the economy was in a state of underemployment beforehand. The task that Friedman then set himself was to reassess the validity of the classical version of the IS-LM model against contrary evidence. To this end, he needed to re-introduce the short-long period divide, which the IS-LM tradition had thrown overboard by concentrating the attention exclusively on the short period. Against this background, he argued that, while money expansion had indeed real effects, these were temporary, reversible and due to a surprise or misperception effect.
