Empirical study informed Friedman's shift to monetarism

The fundamental reason for the different policy rules advocated by Henry Simons and Milton Friedman was the different weights given by the two economists to data construction and analysis for the purpose of developing testable hypotheses, respectively, according to a new paper by Bank of Greece Monetary Policy Council member George Tavlas.

In his paper, In old Chicago: Simons, Friedman and the development of monetary-policy rules, Tavlas argues that although both rules shared the objective of eliminating the policy uncertainty emanating from discretion, they differed because of the different views of Simons and Friedman about the stability of secular relationships.

The main objective of both Simons' price level stabilisation rule and Friedman's money-growth rule was to eliminate policy uncertainty, Tavlas says. Early in his career, Friedman's policy proposals "were remarkably similar to Simons'", Tavas says, "including the latter's proposal that fiscal deficits and surpluses should be used to conduct monetary policy".

Tavlas writes that Friedman changed his view by the late 1950s because of the implications of his empirical work – both that conducted with Anna Schwartz on monetary history, and his own on the determinants and stability of the long-run demand for money.