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In this book Friedman developed the permanent income hypothesis ..
In July 1985, Milton Friedman delivered the presidential address at the Western Economic Association on the topic "Economists and Economic Policy," which was published in the January 1986 issue of Economic Inquiry. He stated that his many years in advocating a monetary "rule," under which the central monetary authority would increase the money supply at a constant annual rate regardless of changing economic conditions, had been a waste of time. The reason, he said, is that there is no basis for thinking it would ever be in the interest of those who managed the government monetary system to follow such a rule:
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(Bloomberg View) -- When you’re wrong, you’re wrong, no matter how famous and respected you might be as a scientist. Albert Einstein about quantum mechanics. Linus Pauling about the structure of DNA. And Milton Friedman was wrong about the permanent income hypothesis. But unlike with the first two examples, where scientists quickly realized the mistake, economists haven’t yet come to grips with the reality.
Who Was Milton Friedman? - The New York Review of …
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The great economist of the University of Chicago Prof. Milton Friedman came out with the Permanent Income Hypothesis in 1957, the core of this theory (PIH) is that people spend money depending on how much they expect to earn in a lifetime. Further Friedman stated that if you get a windfall, you will not run and spend it but save the windfall income. A windfall is different from a raise.
Friedman’s contributions to economic theory are numerous. One of his earliest, described in (1957), was the articulation of the , the idea that a household’s consumption and savings decisions are more affected by changes in its permanent income than by income changes that household members perceive as temporary or transitory. The permanent income hypothesis provided an explanation for some puzzles that had emerged in the empirical data concerning the relationship between the average and marginal propensities to consume. It also helped explain why, for example, activist fiscal policy in the form of a tax increase, if perceived as temporary, might not lead to the intended reductions in consumption; instead, the increased tax might be financed out of savings, leaving consumption levels unchanged. This was Friedman’s novel finding: if households do not perceive permanent income as changing, they will maintain their established spending patterns.
Quantity theory of money - Wikipedia
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Although Friedman did not formally apply the concept of rational expectations in his work, it is implicit in much of his discussion. Because of its heavy emphasis on the role of expectations about future income, his hypothesis was a prime candidate for the application of rational expectations. In work subsequent to Friedman’s, John F. Muth and Stanford’s Robert E. Hall imposed rational expectations on versions of Friedman’s model, with interesting results. In Hall’s version, imposing rational expectations produces the result that consumption is a random walk: the best prediction of future consumption is the present level of consumption. This result encapsulates the consumption-smoothing aspect of the permanent income model and reflects people’s efforts to estimate their wealth and to allocate it over time. If consumption in each period is held at a level that is expected to leave wealth unchanged, it follows that wealth and consumption will each equal their values in the previous period plus an unforecastable or unforeseeable random shock—really a forecast error.
Milton Friedman advocated a fiat or paper money standard guided by a monetary rule of an annual expansion of the money supply at a fixed rate because he believed that it was less costly than a gold standard, less open to inflationary excess, and more likely to provide the monetary framework for general economic stability.
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