monetarists

Monetarists are economists who emphasize the monetary side of the economy as the primary determinant of inflation and real output in the long run. Emerging in the 1950s and 1960s as a critique of Keynesian demand management, the school is closely associated with the Chicago School and figures such as Milton Friedman and Anna Schwartz. They revived the quantity theory of money, arguing that the money stock grows at a relatively stable rate and that inflation results from sustained excess growth of the money supply relative to real output.

A central tenet of monetarism is that the velocity of money is fairly stable over time, so changes in the money supply translate into changes in nominal GDP and prices. In the long run, they contend, money is neutral: increases in the money supply do not raise real variables like output or employment, only prices. The short-run Phillips curve is viewed as unstable, with inflation and unemployment trading off only temporarily as expectations adjust.

Policy implications favor a rules-based approach to monetary policy over discretionary fine-tuning. Monetarists advocate a credible, transparent rule for money growth, or at least a focus on controlling inflation through predictable monetary expansion aligned with growth in potential output. They also argue for central bank independence and a disciplined stance against expansionary fiscal policy that creates monetary instability.

Impact and critiques: Monetarism influenced central banking, especially the emphasis on controlling inflation and institutional credibility. Critics point to unstable money demand, the influence of financial innovation on money velocity, and the possibility of significant short-run real effects from monetary changes, suggesting limits to the simplicity of a fixed money-growth rule.