Definition
Friedman’s k-percent rule is the monetarist proposal that the money supply should be increased by the central bank by a constant percentage rate every year, irrespective of business cycles.
K-Percent Rule
What is ‘K-Percent Rule’
A theory of macroeconomic money-supply growth first postulated by Nobel Prize-winning economist Milton Friedman. The theory states that the best way to control inflation over the long term is to have central banking authorities automatically grow the money supply by a set amount (the “k” variable) each year, regardless of the cyclical state of the economy.
The k-percent rule proposes to set the growth variable at a rate equal to the growth of real GDP each year. This would typically be in the range of 2-4%, based on averages seen in the United States.
Explaining ‘K-Percent Rule’
Milton Friedman is the godfather of monetarism, a branch of economics that singles out monetary growth and related policies as the most important driver of future inflation. While the U.S. Federal Reserve Board is well-versed on the k-percent rule’s merits, in practice most advanced economies do in fact base their monetary growth decisions on the state of the broad economy.
When the economy is cyclically weak, the Federal Reserve and others may look to grow the money supply by more than what the k-percent rule would suggest. Conversely, when the economy is performing well, most central banking authorities will seek to constrain money-supply growth.
Further Reading
- A k-percent rule for monetary policy in West Germany – link.springer.com [PDF]
- A quantitative analysis of oil-price shocks, systematic monetary policy, and economic downturns – www.sciencedirect.com [PDF]
- The Taylor rule and optimal monetary policy – pubs.aeaweb.org [PDF]
- Some new filter rule tests: Methods and results – www.jstor.org [PDF]
- Financial reporting and auditing under alternative damage apportionment rules – meridian.allenpress.com [PDF]
- Financial structure, financial instability, and inflation targeting – link.springer.com [PDF]
- Pension reform, financial market development, and economic growth: preliminary evidence from Chile – link.springer.com [PDF]
