The Rise and Fall of Monetarism
The purpose of this chapter is to present and critically evaluate the major propositions of the monetarist school of economic thought, that is, the school of economic thought according to which the quantity of money is the utmost important economic variable whose changes affect the behaviour of the entire economic system. Although the characterisation Monetarism was coined by Karl Brunner in 1968 to describe a school of economic thought that includes, besides Milton Friedman (1912–2006) and Anna Schwartz (1915–), Bruner himself and Allan Metzler among others, it is in fact a very old school of economic thought since its traces can be found in early nineteenth century. The University of Chicago clings to a free market tradition that restricts government’s intervention to a minimum and seeks to explain the major economic phenomena through a single variable, the supply of money.
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Notes
The difference between the natural unemployment rate and NAIRU is that the NAIRU is a variable unemployment rate as opposed to the natural unemployment rate in which the assumption is that there is a fixed socially optimum unemployment rate. The difference in terms of policies is that in the case of NAIRU the priority is to stabilise prices regardless of the rate of unemployment, whereas in the natural rate of unemployment the priority is the rate of unemployment which must come close to its natural level regardless of inflation rate.
Hence, the famous Goodhart laws that we examine in the next chapter are ascertained.
The desired or target rate of inflation may change but the whole exercise is only meaningful for low rates of inflation.
The expected annual return that the individual will earn from all his assets.
In other words, the principle of purchasing power parity (PPP) holds, that is, the international money (say $100) purchases the same amount of (traded) goods everywhere. If not, an outflow of goods from the relatively low prices countries towards the relatively high prices countries will take place. The subsequent surplus and deficits in trade balances will lead to changes in the exchange rates so as to restore the equality of purchasing power of $100 across countries for the traded commodities. Empirically, we know that the PPP hardly holds even over the very long run (a time period of a century).
The underlying mechanism for these adjustments is the same as with the case of the Phillips curve that we discussed above.
The functional form of PAM is: m t – m t –1 = δ ( m t * – m t ), where m is the demand for money in constant pricesς, m * is the desired demand for money, t is time and 0 δ < 1 is the adjustment coefficient.
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Authors and Affiliations
- Department of Economics, University of Macedonia, 156 Egnatia Street, 540 06, Thessaloniki, Greece Professor Lefteris Tsoulfidis
- Professor Lefteris Tsoulfidis
