Friedman's Influence on Monetary Policy Design Down Under (Australia)

The Nobel Laureate Milton Friedman has been acknowledged as the father of Monetarism and the champion of free market capitalism. Even his critics salute him as a "giant" and "one of the most brilliant economists of all time". Friedman based Monetaritst theories on the classical tradition. He used his monetarists theories to launch a counter-revolution against the dominant Keynesian paradigm that ruled the policy roost over the first two post-war decades. He declared that "inflation is always and everywhere a monetary phenomenon" and the "invisible hand" or the price-mechanism would ensure that the economy would esnure that the economy would always revert to its natural rate or equilibrium level in the long-run without the need for activist policies. Keynes contended that "in the long-run we are all dead" and he advocated activist policies to restore the economy to the natural or full employment level of equilibrium, when the economy deviated from it. Friedman's monetarist perspectives underpin the heated Australian policy debates on the costs and benefits of inflaiton. The paper reviews the rise and fall of rules based on monetary targets favoured by Monetarists over fine-tuning policies favoured by Keynesians in Australia. The adoption of Inflation Targeting in 1993 as the sole instrument for implementing monetary policy after jettisoning the "Check-list" approach is attributable to the influence of Friedman's theories. In this paper we follow Friedman's suggestion and test empirically the dynamics of the links between inflation and inflation uncertainty, thereby providing valuable insights for the design of monetary policies to combat inflation. The dynamic links are empirically validated for Australia, using the Markov Regime Switching Heteroscdasticity (MRSH) model. The emprical results of the MRSH model for Australia, run against the grain of Friedman's predictions on inflation dynamics.The paper also reports the various interpretations based rival paradigms that provide explanations for the pardoxical resutls observed for Australia