Is the Friedman rule still relevant?

Milton Friedman’s argument, which forms the basis of the Friedman rule, is well known. 1 Money is useful for exchanging goods and services, for consumption. The utility derived from holding money is therefore that it reduces transaction costs. The opportunity cost of holding money is the nominal interest rate (the cost of holding money instead of bonds). To maximise well-being, this opportunity cost must then be zero (equal to the marginal cost of producing money, which is zero). By enabling economic agents to hold the necessary money without being penalised, this facilitates transactions (consumption) and increases well-being. Because , for Friedman, inflation is equal to money supply growth in the long run, the money supply must contract at an equal rate to the inverse of the real interest rate, so that the nominal interest rate (the sum of the real interest rate and inflation) is zero. What to make of this argument today? Zero nominal interest rates have indeed enabled economic agents to hold a lot of money, which has probably increased well-being by eliminating the penalty associated with holding liquid assets; But the correlation between money supply growth and inflation disappeared in the 1990s . W e are also see ing the long-term effects of monetary policy on interest rates (nominal and real). Obtaining zero nominal interest rates today requires strong money supply growth, even in the long run, and not a contraction in the money supply; and this strong money supply growth leads to asset price bubbles; Last, low inflation (or negative inflation under the Friedman rule) eliminates seigniorage (inflation tax) and thus erodes public finances. Even though there may indeed be a welfare gain for economic agents associated with zero nominal interest rates (zero opportunity cost of holding money), it is therefore not clear at all that the Friedman rule is relevant today. 1 M. Friedman, The Optimum Quantity of Money , Macmillan, 1969.