Monetarism

Monetarism
See also
Interventionism Austrian theory of money David Ricardo Natural rate of unemployment Price Money emission Inflation import Demand shock Damping effect

Monetarism is a school of economic thought, whose representatives are Milton Friedman, Anna Schwartz, Karl Brunner, Allan Meltzer, David Laidler, Michael Parkin and Alan Walters. Monetarists formulated their views on macroeconomic policy as opposed to excessive Keynesian attachment to fiscal policy. Monetaryism examines the impact of the monetary policy of the state on national income, places particular emphasis on the neutrality of money in the long term and lack of its neutrality in the short term, as well as the difference between the real and nominal interest rate. It is characterized by a deep faith in self-regulating market mechanisms.

Monetaryism was created around 1956. The publication of the so-called quantitative theory of money by Milton Friedman.

Monetary policy

Monetarists argue that the goal of monetary policy is to recognize the control of the money supply. This control assumes breaking with the principle of constant exchange rates. In an open economy, at constant exchange rates, only the size of loans can be controlled, but not the money supply. According to monetarists, the government can maintain the nominal interest rate, while the real rate depends on the expected inflation rate. Equal and nominal interest rate equation is unlikely, but it can occur when the expected inflation rate is zero. Monetaryism assumes that in the short term the government may influence the unemployment rate by using monetary stimuli. However, if such a solution does not bring the unemployment rate closer to the natural rate, the effect in the long run will be the acceleration of inflation. Friedman argues that there should not be too many movements on the part of monetary authorities in the interim period. However, a good solution is the free operation of monetary regularities, manipulating gently with tools that reduce inflation, while simultaneously bringing the real rate closer to the natural unemployment rate.

Thus, monetary analysts focus on monetary policy. The state's fiscal policy, in their opinion, does not exert too much influence on the amount of real national income and employment. They also believe that in the free market economy one has to take into account the existence of some unemployment, but at the same time assuming the willingness of people and their desire to find the best possible jobs and the existence of a benefit system.

Friedman showed that the demand for money is strongly dependent on various economic variables and can be calculated quickly on their basis. Thus, when the state increases the emission of money above the calculated value, it will increase the amount of money in people, which will be spent mostly on additional consumption, and this in turn will lead to a temporary increase in the standard of living. Looking long-term, such an increase in the standard of living will not have coverage in the supply of goods and services. The short-term increase in the consumption of goods and services causes a constant increase in needs over the long term, which is associated with a constant emphasis on increased money supply. In this situation, the state will either continue to increase the money supply leading to inflation or raise public dissatisfaction with lowering citizens' incomes.

Impact of money supply on GNP

Another assumption of monetarism is the statement that the money supply is the basic, constant factor determining the growth of the nominal Gross National Product. This means that basic variables such as the global product, employment and prices are shaped primarily by money. According to the "quantitative exchange equation":

MV = PQ

where:

• M - amount of money
• V - speed of money circulation
• P - average price level
• Q - real price level.

At a constant rate of money circulation, only the money supply affects the nominal GNP.

Friedman accepted the money supply as the most important factor shaping the Gross National Product level, and inflation ascribing only the role of the monetary phenomenon. He recommended increasing the money supply at the rate of growth of the Gross National Product, which was to ensure stabilization in the economy.

The role of wages

The next point in monetary theory is the assumption that wages and prices are relatively flexible. As a result of changes in the money supply on the market, the average price level changes. Monetarists also believe that the private sector is stable. This is due to the fact that changes in nominal GNP are mainly caused by changes in the money supply, and monetary policy changes under the influence of external policies and events, which directly does not affect the private economy.

References

• Kaldor, N. (1970). The new monetarism]. Lloyds Bank Review, 97(1), 18.
• Clarke, S. (1988). Keynesianism, Monetarism and the Crisis of the State (p. 120-54). Aldershot: Elgar.
• De Long, J. B. (2000). The triumph of monetarism?. Journal of Economic Perspectives, 14(1), 83-94.