Constant Growth Rate Rule

The constant growth rate rule is one worm in a whole can of worms labeled :"monetarism" by Milton Friedman. Monetarism is an entire school of thought, an economic rulebook on “if x, then y” for many situations.

Constant growth rate rule is a key tenet of monetarism, which states that the Fed (the Federal Reserve, the governmental body that tinkers with interest rates to balance unemployment and inflation) should be required to aim their tinkering powers toward a target where the growth of the rate of money would equal the growth rate of real GDP. In other words, monetarism says: we should be keeping our growth rate of money proportional to the growth rate of real GDP. Which means that, if we predict the economy will grow 3% this year, we (the Fed) should also increase the money supply by 3%.

Underlying this is a criticism Friedman had over how the Fed handled the Great Depression (hint: he puts a lot of blame on the Fed for how things went). His thought is that, if the Fed is stable following a prescribed regimine, then the economy would be more stable, too.

Others, however, think this is nonsense, because the whole point of the Fed is to be there to change things as a counteractive effect when need be.

Economics is a complicated animal.