monetarism

Monetarism is a macroeconomic school that emphasizes the role of a country's money supply in determining inflation and economic activity. It arose in the mid-20th century and is closely associated with Milton Friedman and Anna Schwartz, who argued that monetary forces, more than fiscal or aggregate demand policies, largely shape nominal outcomes over time.

A core idea is the quantity theory of money, often expressed by the equation MV = PY, where M is the money stock, V is the velocity of money, P is the price level, and Y is real output. Monetarists typically treat V as relatively stable in the short run, so changes in M lead to proportional changes in P in the long run, with limited effect on real output. This underpins the view that inflation is ultimately a monetary phenomenon if the money supply grows faster than real output.

In the short run, monetarists acknowledge that monetary policy can influence real variables due to price and wage rigidities, but they argue that sustained policy should pursue a steady, predictable growth rate of the money stock rather than discretionary stimulus or manipulation of interest rates. They advocate rule-based policy to avoid time-inconsistency and minimize inflationary expectations, and they are often critical of active fiscal stimulus and demand-management policies.

Historical influence and reception: Monetarism gained prominence in the 1960s–70s as a critique of Keynesianism and influenced central-bank practices in the 1980s, notably in favoring tight monetary policy to combat inflation. Over time, its strict prescriptions have been tempered by new theoretical developments, though money-supply rules and the primacy of monetary policy in inflation research remain influential in policy debates.