ease lowers interest rates in the short run but raises them in the long run. let me emphasize again that these propositions reflected friedman ’ s view as of some thirty - five years ago. at the time, they were far from being the conventional wisdom, as suggested by the term “ counter - revolution ” in the essay ’ s title. what do we make of these propositions today? first, the empirical description of the dynamic effects of money on the economy given in the first six propositions would be viewed by most policymakers and economists today as being, as the british would put it, “ spot on ”. as a minor illustration of this point, in my own academic research i contributed to a large modern econometric literature that has used vector autoregression and other types of time series models to try to quantify how monetary policy affects the economy. the economic dynamics estimated by these methods correspond very closely to those outlined in friedman ’ s propositions. these methods confirm that a monetary expansion ( for example ) leads with a lag of one to two quarters to an increase in nominal income. perhaps more importantly, as friedman emphasized, the responses of the quantity and price components of nominal income have distinctly different timing. in particular, as friedman told us, a monetary expansion has its more immediate effects on real variables such as output, consumption, and investment, with the bulk of these effects occurring over two to three quarters. ( i was going to say, as friedman first told us, but perhaps the credit for that should go to david hume. milton ’ s work is, after all, part of a long and great tradition of classical monetary analysis. ) these real effects tend to dissipate over time, however, so that at a horizon of twelve to eighteen months the effects of a monetary expansion or contraction are felt primarily on the rate of inflation. the same patterns have been found in empirical studies for virtually all countries, not only by vector autoregression analysis but by more structural methods as well. they are reflected in essentially all contemporary econometric models used for forecasting and policy analysis, such as the frbus model at the federal reserve. the lag between monetary policy changes and the inflation response is the reason that modern inflation - targeting central banks, such as the bank of england, set a horizon of up to two years for achieving their inflation objectives. thus friedman ’ s description of the economic dynamics set in train by a monetary expansion or contraction, summarized in his

that monetary stability actively promotes efficiency and growth. ( hence friedman ’ s suggestion that the long - run phillips curve, rather than vertical, might be positively sloped. ) also implicit in friedman ’ s focus on nominal stability is the view that central banks should avoid excessively ambitious attempts to manage the real economy, which in practice may exacerbate both nominal and real volatility. in friedman ’ s classic 1960 work, a program for monetary stability, he suggested that monetary stability might be attained by literally keeping money stable : that is, by fixing the rate of growth of a specific monetary aggregate and forswearing the use of monetary policy to “ fine - tune ” the economy. do contemporary monetary policymakers provide the nominal stability recommended by friedman? the answer to this question is not entirely straightforward. as i discussed earlier, for reasons of financial innovation and institutional change, the rate of money growth does not seem to be an adequate measure of the stance of monetary policy, and hence a stable monetary background for the economy cannot necessarily be identified with stable money growth. nor are there other instruments of monetary policy whose behavior can be used unambiguously to judge this issue, as i have already noted. in particular, the fact that the federal reserve and other central banks actively manipulate their instrument interest rates is not necessarily inconsistent with their providing a stable monetary background, as that manipulation might be necessary to offset shocks that would otherwise endanger nominal stability. ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal gdp growth and inflation. on this criterion it appears that modern central bankers have taken milton friedman ’ s advice to heart. over the past two decades, inflation has fallen sharply and stabilized around the world, not only in the industrialized nations but in emerging - market economies and in even the poorest developing nations. some central banks, so - called inflation targeters, have set explicit, quantitative targets for inflation ; but all central banks, certainly including the federal reserve, have emphasized the importance of achieving and maintaining price stability. on the issue of inflation control, friedman may be judged to have been a bit too pessimistic ; his concerns that central banks would have neither the technical ability nor the correct incentives to control inflation led him to recommend his money - growth rule, for which a central bank could certainly be held accountable. evidently, however, determined central banks can stabilize inflation directly, at least they have been able