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K-Percent Rule

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.

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]
… Page 10. Scheide: A K-Percent Rule 335 … Journal of Monetary Economics, Vol. 16. 1985. pp. 141-163. Kydland, Finn E., Edward C, Prescott, "Rules Rather than Discretion: The Inconsistency of Optimal Plans". Journal ofPoBticalEconomy, Vol. 85, 1977, pp. 473--491 …

A quantitative analysis of oil-price shocks, systematic monetary policy, and economic downturnsA quantitative analysis of oil-price shocks, systematic monetary policy, and economic downturns
www.sciencedirect.com [PDF]
… Page 10. Scheide: A K-Percent Rule 335 … Journal of Monetary Economics, Vol. 16. 1985. pp. 141-163. Kydland, Finn E., Edward C, Prescott, "Rules Rather than Discretion: The Inconsistency of Optimal Plans". Journal ofPoBticalEconomy, Vol. 85, 1977, pp. 473--491 …

The Taylor rule and optimal monetary policyThe Taylor rule and optimal monetary policy
pubs.aeaweb.org [PDF]
… Page 10. Scheide: A K-Percent Rule 335 … Journal of Monetary Economics, Vol. 16. 1985. pp. 141-163. Kydland, Finn E., Edward C, Prescott, "Rules Rather than Discretion: The Inconsistency of Optimal Plans". Journal ofPoBticalEconomy, Vol. 85, 1977, pp. 473--491 …

Some new filter rule tests: Methods and resultsSome new filter rule tests: Methods and results
www.jstor.org [PDF]
… Page 10. Scheide: A K-Percent Rule 335 … Journal of Monetary Economics, Vol. 16. 1985. pp. 141-163. Kydland, Finn E., Edward C, Prescott, "Rules Rather than Discretion: The Inconsistency of Optimal Plans". Journal ofPoBticalEconomy, Vol. 85, 1977, pp. 473--491 …

Financial reporting and auditing under alternative damage apportionment rulesFinancial reporting and auditing under alternative damage apportionment rules
meridian.allenpress.com [PDF]
… Page 10. Scheide: A K-Percent Rule 335 … Journal of Monetary Economics, Vol. 16. 1985. pp. 141-163. Kydland, Finn E., Edward C, Prescott, "Rules Rather than Discretion: The Inconsistency of Optimal Plans". Journal ofPoBticalEconomy, Vol. 85, 1977, pp. 473--491 …

Financial structure, financial instability, and inflation targetingFinancial structure, financial instability, and inflation targeting
link.springer.com [PDF]
… Page 10. Scheide: A K-Percent Rule 335 … Journal of Monetary Economics, Vol. 16. 1985. pp. 141-163. Kydland, Finn E., Edward C, Prescott, "Rules Rather than Discretion: The Inconsistency of Optimal Plans". Journal ofPoBticalEconomy, Vol. 85, 1977, pp. 473--491 …

Pension reform, financial market development, and economic growth: preliminary evidence from ChilePension reform, financial market development, and economic growth: preliminary evidence from Chile
link.springer.com [PDF]
… Page 10. Scheide: A K-Percent Rule 335 … Journal of Monetary Economics, Vol. 16. 1985. pp. 141-163. Kydland, Finn E., Edward C, Prescott, "Rules Rather than Discretion: The Inconsistency of Optimal Plans". Journal ofPoBticalEconomy, Vol. 85, 1977, pp. 473--491 …



Q&A About K-Percent Rule


Who is Milton Friedman?

Milton Friedman is a Nobel Prize winning economist who was one of two most influential economists (the other being Paul Samuelson) during his time. He was known for his work on monetarism, which focused on monetary policy as an important driver of future inflation and economic activity.

How much should monetary growth be in accordance with the k-percent rule?

Monetary growth should equal real GDP growth each year. This would typically be in the range of 2 to 4 percent based on averages seen in advanced economies such as those found in Europe and North America.

What does the k-percent rule state about controlling inflation over the long term?

The k-percent rule states that central banking authorities should automatically grow the money supply by a set amount each year, regardless of the cyclical state of the economy.

Is it possible for central banks to use this method too often?

Yes , it may be possible for central banks to use this method too often because they may have difficulty lowering their target rate once it has been increased .

What is K-Percent Rule?

The K-Percent rule is a monetary policy guideline developed by the Federal Reserve.

What is the k-percent rule?

The k-percent rule is a theory of macroeconomic money-supply growth first postulated by Nobel Prize-winning economist Milton Friedman.

What does the K-Percent rule state?

The K-percent rule states that if inflation exceeds a certain level, then interest rates should be raised to control inflation and stabilize economic growth.

Why do many central banks not follow this approach to monetary policy?

Most advanced economies do not base their monetary policies on following this approach because they realize that it can lead to severe recessions when there are large changes in real GDP or if there are major changes in velocity (how quickly money moves through an economy). For example, if an economy has been growing at 10% per year but then suddenly falls into recession due to some external shock, then it would make sense for central banks to increase their money supply rapidly until output returns back towards its trend level (or even beyond). In addition, when velocity slows down significantly during times like these, then it also makes sense for central banks to increase their money supply more rapidly than what would be suggested by following a strict application of this formula

Who developed the K-Percent rule?

Ben S. Bernanke, former chairman of the Federal Reserve System.

When was the K-Percent rule created?

In 2151.

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