00:01
One argument for giving discretion to central bankers is that sometimes emergencies come along that a simple rule cannot solve.
00:09
Suppose there's a massive permanent negative shock to velocity.
00:13
Naturally, if the central bank has discretion, it will immediately respond by boosting money growth.
00:19
But let's look at the alternative.
00:22
A, suppose that the central bank follows a fixed 3 % annual monetary growth rule, as milton friedman sometimes recommended.
00:30
In the short run, what will the velocity shock do to real growth and inflation? b, in the long run, what will this velocity shock due to real growth and to inflation? c.
00:44
If voters are concerned only about real growth in the long run, will they favor rules, will they favor discretion, or will they be indifferent between the two? d, if voters are impatient and concerned only about real growth in the short run, will they favor rules? will they favor discretion or will they be indifferent between the two? e, which kind of voters favor discretion? those with long run horizon or those with a short run horizon.
01:14
A, if the central bank follows a fixed 3 % annual money growth rule, it will not respond immediately in case of negative velocity shock.
02:18
With a stable money supply, the level of gdp is proportional, to the velocity of money.
02:57
In other words, if the velocity of money decreases, it will lead to lower inflation and lower real growth...