Milton Freidmanâs greatest contribution to economics and the real point of inflation targeting, have Monetaristsâ misunderstood Monetarism? http://morganisteconomics.blogspot.com/2011/02/milton-freidmans-greatest-contribution.html If you discuss economics with a Monetarist they often, in fact almost always, claim the reason they intervene with aggregate demand is to achieve slow economic growth. Whether you believe this action to be virtuous or not it has other benefits which most Monetaristsâ do not seem to understand. My personal view on inflation targeting has changed over the years, originally I deposed the concept due to the negative attributes, the main one being the inflexibility it can create in free markets. Now I have come to appreciate what I think Milton Freidman was noticing when he pushed the concept of monetary control, in the shape of Monetarism, in the 1970âs. This revelation comes in the form of the benefits that a constant level of inflation creates for the transparency of financial products and in particular the consistency and accuracy of return, which in turn enable risk (in particular long term risk) to be estimated more accurately. I think the reason why Freidman advocated inflation targeting was not as the Monetaristsâ claim, to achieve slow economic growth, but rather to enable the effective functioning of the investment market. I have come to this view point from my own re-modelling of the valuation and risk calculations, which I have been developing to provide a solution to what I think the real route of the banking crisis is. During this I found it was extremely beneficial when estimating future returns and in turn the risk, to make the variable rate of inflation constant. For example if you are attempting to estimate the return on an investment over four or five years the rate of inflation will depreciate that return. When inflation is variable the estimation is almost impossible, although there are models that can provide questionably accurate results it is not a constant result which inflation targeting provides. With a constant rate of inflation over a long period of time I can make the calculations reflect the expected return with a much greater level of accuracy. The longer the investment the more beneficial this function of inflation targeting becomes and the greater the transparency of risk and the desirability of investment becomes. As Freidman was a statistician he would have appreciated the financial modelling aspect of long term economics, I believe this is what he was really trying to achieve with Monetarism rather than the mainstream view that it is an effort to control the business cycle. Although I agree with the idea of inflation targeting I do not think the target has to be a static number and that it is not required to achieve this aim. If the rate of inflation is planned in advance, even if it is variable it can enable accurate prediction. The main benefit is the pre-event information that enables investors to accurately compute the reducing factor that inflation has on return. For example the inflation target could be two percent one quarter, then three percent the next quarter, then four percent the next quarter etc. As long as the target has been set in advance and it is met the ability to estimate the expected return is retained. This brings me to the conclusion that although I agree with inflation targeting I do not necessarily believe the inflation target should be a constant percentage of GDP.