Zero Nominal Interest Rates: Why They’re Good and How to Get Them

In a classic essay, Milton Friedman (1969, p. 34) states that only monetary policies that generate a zero nominal interest rate will lead to optimal resource allocations. He argues that "it costs ... no physical resources to add to real cash balances," and hence it follows that "the optimum quantity of money . . . will be attained by a rate of price deflation that makes the nominal rate of interest equal to zero" (italics in original). This prescription of zero nominal interest rates has come to be known as the Friedman ride.