Macroeconomic Dynamics, 5, 2001, 101–131. Printed in the United States of America.
                MDINTERVIEW
                ANINTERVIEWWITH
                MILTONFRIEDMAN
                Interviewed by John B. Taylor
                Stanford University
                May2,2000
                “His views have had as much, if not more, impact on the way we think about
                monetarypolicyandmanyotherimportanteconomicissuesasthoseofanyperson
                inthelasthalfofthetwentiethcentury.”ThesewordsinpraiseofMiltonFriedman
                are fromeconomistandFederalReserveChairAlanGreenspan.Theyarespoken
                from a vantage point of experience and knowledge of what really matters for
                policy decisions in the real world. And they are no exaggeration. Many would
                say they do not go far enough.
                It is a rare monetary policy conference today in which Milton Friedman’s ideas
                do not come up. It is a rare paper in macroeconomics in which some economic,
                mathematical, or statistical idea cannot be traced to Milton Friedman’s early
                work. It is a rare student of macroeconomics who has not been impressed by
                reading Milton Friedman’s crystal-clear expositions. It is a rare democrat from
                a formerly communist country who was not inspired by Milton Friedman’s de-
                fense of a market economy written in the heydays of central planning. And it
                is a rare day that some popular newspaper or magazine around the world does
                not mention Milton Friedman as the originator of a seminal idea or point of
                view.
                Anyoneofhismanycontributionstomacroeconomics(orrathertomonetarythe-
                ory, for he detests the term macroeconomics) would be an extraordinary achieve-
                ment. Taken together they are daunting:
                    • permanent income theory;
                    • natural rate theory;
                    • the case for floating exchange rates;
                    • moneygrowthrules;
                    • the optimal quantity of money;
                    • themonetaryhistoryoftheUnitedStates,especiallytheFedintheGreatDepression,
                      nottomentioncontributionstomathematicalstatisticsonrank-ordertests,sequential
                      sampling, and risk aversion, and a host of novel government reform proposals from
                      the negative income tax, to school vouchers, to the flat-rate tax, to the legalization of
                      drugs.
                Address correspondence to: John B. Taylor, Department of Economics, Stanford University, Stanford, CA 94305-
                6072, USA; e-mail: johnbtaylor@leland.stanford.edu.
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                °2001CambridgeUniversityPress   1365-1005/01 $9.50
            102   JOHNB.TAYLOR
            MiltonFriedmanisaneconomist’seconomistwholaidoutaspecificmethodology
            of positive economic research. Economic experts know that many current ideas
            and policies—from monetary policy rules to the earned-income tax credit—can
            betracedtohisoriginalproposals.HewontheNobelPrizeineconomicsin1976
            for “his achievements in the field of consumption analysis, monetary history
            and theory and for his demonstration of the complexity of stabilization policy.”
            Preferringtostayawayfromformalpolicy-makingjobs,hehasbeenaskedforhis
            advicebypresidents,primeministers,andtopeconomicofficialsformanyyears.
            It is in the nature of Milton Friedman’s unequivocally stated views that many
            disagree with at least some of them, and he has engaged in heated debates since
            graduate school days at the University of Chicago. He is an awesome debater.
            Heisalso gracious and friendly.
            Bornin1912,hegrewupinRahway,NewJersey,whereheattendedlocal
            public schools. He graduated from Rutgers University in the midst of the Great
            Depressionin1932.HethenwenttostudyeconomicsattheUniversityofChicago,
            where he met fellow graduate student Rose Director whom he later married.
            For nearly 10 years after he left Chicago, he worked at government agencies and
            research institutes (with one year visiting at the University of Wisconsin and
            one year at the University of Minnesota) before taking a faculty position at the
            UniversityofChicagoin1946.HeremainedatChicagountilheretiredin1977at
            the age of 65, and he then moved to the Hoover Institution at Stanford University.
            I have always found Milton and Rose to be gregarious, energetic people, who
            genuinely enjoy interacting with others, and who enjoy life in all its dimensions,
            from walks near the Pacific Ocean to surfs on the World Wide Web. The day of
            this interview was no exception. It took place on May 2, 2000, in Milton’s office
            in their San Francisco apartment. The interview lasted for two-and-a-half hours.
            Ataperecorderandsomeeconomicchartswereonthedeskbetweenus.Behind
            Milton was a floor-to-ceiling picture window with beautiful panoramic views of
            the San Francisco hills and skyline. Behind me were his bookcases stuffed with
            his books, papers, and mementos.
            Theinterview began in a rather unplanned way. When we walked into his office
            Milton started talking enthusiastically about the charts that were on his desk.
            Thecharts—whichhehadrecentlypreparedfromdatahehaddownloadedfrom
            the Internet—raised questions about some remarks that I had given at a
            conference several weeks before—which he had read about on the Internet.
            Aswebegantalkingaboutthecharts,IaskedifIcouldturnonthetaperecorder,
            since one of the topics for the interview was to be about how he formulated his
            ideas—andaconversation about the ideas he was formulating right then and
            there seemed like an excellent way to begin the interview. So I turned on the
            tape recorder, and the interview began. Soon we segued into the series of
            questions that I had planned in advance (but had not shown Milton in advance).
            Wetookonebreakforaverypleasantlunchand(unrecorded)conversation with
            his wife Rose before going back to “work.” After the interview, the tapes were
            transcribed and the transcript was edited by me and Milton. The questions and
            answers were rearranged slightly to fit into the following broad topic areas:
               • moneygrowth,thermostats, and Alan Greenspan;
               • causes of the great inflation and its end;
                                  INTERVIEWWITHMILTONFRIEDMAN   103
             • early interest in economics;
             • graduate school and early “on-the-job” training;
             • permanent income theory;
             • return of monetary economics;
             • fiscal and monetary policy rules;
             • use of models in monetary economics;
             • use of time-series methods;
             • real business-cycle models, calibration, and detrending;
             • natural rate hypothesis;
             • role of debates in monetary economics;
             • capitalism and freedom today;
             • monetary unions and flexible exchange rates.
          Keywords: Permanent Income Theory, Natural Rate Hypothesis, Floating Ex-
          change Rates, Monetary Policy Rules, Money Growth
          MONEYGROWTH,THERMOSTATS,ANDALANGREENSPAN
            Friedman: [Referring to the charts in Figures 1 and 2] I thought that you’d be
          interested in these charts. Don’t you think it’s as if the Fed has installed a new and
                                           1
          improved thermostatic controller in the 1990s!
          FIGURE 1. Year-to-year change in U.S. real M2 and real GDP, 1960.1–1999.3. (Source:
          Milton Friedman, February 20, 2000.)
            104   JOHNB.TAYLOR
            FIGURE 2. Velocity of M1, M2, M3, and log trends based on data from 1959–1980, annual
            data, 1959–1999. (Source: Milton Friedman, April 30, 2000.)