monetarist

Monetarism is a school of macroeconomic thought that emphasizes the role of a country's money supply in determining inflation and economic activity. Monetarists contend that in the long run the price level is mainly shaped by the growth rate of the money supply, while real variables such as output and employment are influenced more by real resources and technology than by monetary changes. The core framework relies on a version of the quantity theory of money, summarized by the equation MV = PY, where V is the velocity of money, P the price level, M the money stock, and Y real output. Because money growth influences prices but not real output in the long run, monetarists advocate policies that provide price stability through predictable, rules-based monetary growth rather than discretionary interventions.

Historical development and key figures: Monetarism rose to prominence in the 1950s and 1960s, led by Milton Friedman and, with Anna Schwartz, through a revival of the quantity theory. Friedman argued that excessive growth in the money supply caused inflation and that monetary policy should target a steady trajectory for money growth. By emphasizing monetary discipline, monetarists often criticized Keynesian demand management and fiscal activism as misguided or ineffective.

Policy implications and adoption: Monetarists favored rules-based approaches over discretionary policy, typically endorsing a predetermined growth path for the money supply or an explicit inflation target to anchor expectations. Their ideas influenced central banking practices in the 1970s and 1980s, including episodes of monetary restraint in the United States and the United Kingdom. In practice, most central banks now blend monetarist insights with other frameworks, such as inflation targeting, rather than adhering to a strict money-growth rule.

Criticisms and legacy: Critics argue that money supply grew unpredictably and that velocity is unstable, undermining the effectiveness of monetarist policy rules, especially in the short run. The rise of New Keynesian economics integrated some monetarist insights while preserving a role for demand management. Nonetheless, monetarism helped shift the emphasis of monetary policy toward price stability and expectations.