The following is an excerpt from Capitalism and Freedom, Chapter 3: The Control of Money (page 53-55 in paperback, 40th Anniversary Edition) by Milton Friedman
If a [monetary policy] rule is to be legislated, what rule should it be? The rule that has been most frequently suggested by people of a generally [neo-] liberal persuasion is a price level rule; namely a legislative directive to the monetary authorities that they maintain a stable price level. I think this is the wrong kind of rule. It is the wrong kind of rule because it is in terms of objectives that the monetary authorities do not have the clear and direct power to achieve by their own actions. It consequently raises the problem of dispersing responsibilities and leaving the authorities too much leeway. There is unquestionably a close connection between monetary actions and the price level. But the connection is not so close, so invariable, or so direct that the objective of achieving a stable price level is an appropriate guide to the day-to-day activities of the authorities.
Ok, so tell me that NGDP level targeting, which is the next evolution in the monetarist tradition is a bad idea. Ronald Reagan believed very deeply in the work of Milton Friedman, and so someone needs to explain to me why Republicans are forgetting this and going off the deep end when the Fed is finally remembering what its real purpose is – nominal stability, not price stability.
Saturos raised a good point that old monetarism, steady growth in the money stock is not the right policy either. Leaving that part of the quote up here would only defeat my purpose, as part of the deceptive nature of the current problem is that the demand for money is greater than the supply, and with IOR, the apparent growth in the base over the last few years isn’t solving anything as well as not being a good indicator of the stance of monetary policy. My intent was not to confuse and my purpose is served without it, so it’s been removed.
The basic point of Friedman’s argument was that the Fed should provide nominal stability instead of focusing on prices because it avoids much of the difficulty in measurement and provides a nominal anchor so that inflation is kept under control. NGDP level targeting is a more sophisticated evolution of monetarism, provides stability and a nominal anchor that were basic elements of Friedman’s policy proposal, except it is forward looking and more stable as conditions in the economy change.