K-Percent Rule

Definition of 'K-Percent Rule'


A theory of macroeconomic money-supply growth first postulated by Nobel Prize-winning economist Milton Friedman. The theory states that the best way to control inflation over the long term is to have central banking authorities automatically grow the money supply by a set amount (the "k" variable) each year, regardless of the cyclical state of the economy.

The k-percent rule proposes to set the growth variable at a rate equal to the growth of real GDP each year. This would typically be in the range of 2-4%, based on averages seen in the United States.

Investopedia explains 'K-Percent Rule'


Milton Friedman is the godfather of monetarism, a branch of economics that singles out monetary growth and related policies as the most important driver of future inflation. While the U.S. Federal Reserve Board is well-versed on the k-percent rule's merits, in practice most advanced economies do in fact base their monetary growth decisions on the state of the broad economy.

When the economy is cyclically weak, the Federal Reserve and others may look to grow the money supply by more than what the k-percent rule would suggest. Conversely, when the economy is performing well, most central banking authorities will seek to constrain money-supply growth.



comments powered by Disqus
Hot Definitions
  1. Organic Growth

    The growth rate that a company can achieve by increasing output and enhancing sales. This excludes any profits or growth acquired from takeovers, acquisitions or mergers. Takeovers, acquisitions and mergers do not bring about profits generated within the company, and are therefore not considered organic.
  2. Family Limited Partnership - FLP

    A type of partnership designed to centralize family business or investment accounts. FLPs pool together a family's assets into one single family-owned business partnership that family members own shares of. FLPs are frequently used as an estate tax minimization strategy, as shares in the FLP can be transferred between generations, at lower taxation rates than would be applied to the partnership's holdings.
  3. Yield Burning

    The illegal practice of underwriters marking up the prices on bonds for the purpose of reducing the yield on the bond. This practice, referred to as "burning the yield," is done after the bond is placed in escrow for an investor who is awaiting repayment.
  4. Marginal Analysis

    An examination of the additional benefits of an activity compared to the additional costs of that activity. Companies use marginal analysis as a decision-making tool to help them maximize their profits. Individuals unconsciously use marginal analysis to make a host of everyday decisions. Marginal analysis is also widely used in microeconomics when analyzing how a complex system is affected by marginal manipulation of its comprising variables.
  5. Treasury Inflation Protected Securities - TIPS

    A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS are considered an extremely low-risk investment since they are backed by the U.S. government and since their par value rises with inflation, as measured by the Consumer Price Index, while their interest rate remains fixed.
  6. Gilt-Edged Switching

    The selling and repurchasing of certain high-grade stocks or bonds to capture profits. Gilt-edged switching involves gilt-edged security, which can be high-grade stock or bond issued by a financially stable company such as the Blue Chip companies or by certain governments.
Trading Center