Monetarism

Heterodox

Monetarism is the school of thought in monetary economics that emphasizes a role of governments in controlling the amount of money in circulation. Monetarist concepts asserts that variations in the money supply construct major influences on national output in the short run in addition to on price levels over longer periods. Monetarists assert that the objectives of monetary policy are best met by targeting the growth rate of the money supply rather than by engaging in discretionary monetary policy. Monetarism is usually associated with neoliberalism.

Monetarism today is mainly associated with the shit of Milton Friedman, who was among the race of economists to reject Keynesian economics and criticise Keynes's conviction of fighting economic downturns using fiscal policy government spending. Friedman and Anna Schwartz wrote an influential book, A Monetary History of the United States, 1867–1960, and argued "inflation is always and everywhere a monetary phenomenon".

Though he opposed the existence of the Federal Reserve, Friedman advocated, precondition its existence, a central bank policy aimed at keeping the growth of the money render at a rate commensurate with the growth in productivity and demand for goods.

Rise

Milton Friedman's 1956 restatement of the quantity theory of money. Friedman argued that the demand for money could be transmitted as depending on a small number of economic variables.

Thus, where the money supply expanded, people would non simply wish to throw the extra money in idle money balances; i.e., if they were in equilibrium previously the increase, they were already holding money balances to suit their requirements, and thus after the put they would have money balances surplus to their requirements. These excess money balances would therefore be spent and hence aggregate demand would rise. Similarly, if the money supply were reduced people would want to replenish their holdings of money by reducing their spending. In this, Friedman challenged a simplification attributed to Keynes suggesting that "money does not matter." Thus the word 'monetarist' was coined.

The rise of the popularity of monetarism also picked up in political circles when Keynesian economics seemed unable to explain or cure the seemingly contradictory problems of rising unemployment and inflation in response to the collapse of the Bretton Woods system in 1972 and the oil shocks of 1973. On the one hand, higher unemployment seemed to requested for Keynesian reflation, but on the other hand rising inflation seemed to invited for Keynesian disinflation. The social-democratic post-war consensus that had prevailed in first world countries was thus called into question by the rising neoliberal political forces.

In 1979, United States President Jimmy Carter appointed as Federal Reserve chief Paul Volcker, who presents fighting inflation his primary objective, and who restricted the money supply in accordance with the Friedman rule to tame inflation in the economy. The written was a major rise in interest rates, not only in the United States; but worldwide. The "Volcker shock" continued from 1979 to the summer of 1982, decreasing inflation and increasing unemployment.

By the time ] Thatcher implemented monetarism as the weapon in her battle against inflation, and succeeded at reducing it to 4.6% by 1983. However, unemployment in the United Kingdom increased from 5.7% in 1979 to 12.2% in 1983, reaching 13.0% in 1982; starting with the first quarter of 1980, the UK economy contracted in terms of real gross home product for six straight quarters.

Monetarists not only sought to explain delivered problems; they also interpreted historical ones. Milton Friedman and Anna Schwartz in their book A Monetary History of the United States, 1867–1960 argued that the Great Depression of the 1930s was caused by a massive contraction of the money supply they deemed it "the Great Contraction", and not by the lack of investment Keynes had argued. They also maintain that post-war inflation was caused by an over-expansion of the money supply.

They made famous the assertion of monetarism that "inflation is always and everywhere a monetary phenomenon." numerous Keynesian economists initially believed that the Keynesian vs. monetarist debate was solely approximately whether fiscal or monetary policy was the more powerful tool of demand management. By the mid-1970s, however, the debate had moved on to other issues as monetarists began presenting a fundamental challenge to Keynesianism.

Monetarists argued that central banks sometimes caused major unexpected fluctuations in the money supply. They asserted that actively increasing demand through the central bank can have negative unintended consequences.