A modern revival of the QUANTITY THEORY OF MONEY, making use of modern NEOCLASSICAL ECONOMICS. It regards the money supply as the most important determinant of aggregate money income and reasserts the relevance of price theory to macroeconomics. Central to monetarism are the concepts of a TRANSMISSION MECHANISM to allow money to influence output, via relative prices, of normal output (employment) instead of FULL EMPLOYMENT, of the NATURAL RATE OF UNEMPLOYMENT, of monetary impulses between transitory and more permanent components of movements in price level and output, and of a POLITICAL ECONOMY of society which analyses the role of government non-sociologically FRIEDMAN’S works from the 1950s are the most famous writings on this subject. Popularly, monetarism is thought of as a tough FISCAL STANCE and careful attention to monetary variables when targeting the economy In practice, most monetarists use the gradualist approach of aiming for a rate of monetary expansion likely to achieve long-term price stability DEMAND MANAGEMENT is avoided because of the belief that an economy will always tend to the NATURAL RATE OF UNEMPLOYMENT.
It made headlines in the USA when the 1968 tax increase failed to curb inflation and when the monetarists at the Federal Reserve Bank of St Louis made striking predic tions for 1969. In the USA from 1979 to 1981 and in the UK from the mid-1970s to mid-1980s, with varying degrees of enthusiasm, governments attempted to apply monetarist principles to their macroeconomic policy making.
References
Friedman, M. (ed.) (1956) Studies in the Quantity Theory of Money, Chicago: Chicago University Press.
——(1969) The Optimum Quantity of Money and other Essays, London: Macmillan.
Laidler, D., Tobin, J., Matthews, R.C.O. and Meade, J.E. (1981) ‘Conference papers on monetarism—an appraisal’, Economic Journal 91:1–57.
