Monetarists


Monetarists - Introduction

Monetarists are a group of economists so named because of their preoccupation with money and its effects. The most famous Monetarist is Milton Friedman who developed much of the Monetarist theory we learn.

Monetarism is very closely allied with the classical school of thought. It is essentially an extension of classical theory which was developed in the 1960s and 1970s to try to explain a new economic phenomenon - stagflation. Stagflation was an expression coined to try to explain
two simultaneous economic problems - stagnation and inflation. It could perhaps have been called 'inflanation' but that sounds more like a medical problem than an economic one.

Much of the Monetarists' work revolved around the role of expectations in determining inflation, and a key part of their theory was the development of the expectations-augmented Phillips Curve.

Monetarists - Beliefs

In their work Monetarists draw a lot on Classical economics. They re-evaluated the Quantity Theory of Money and argued that increases in the money supply would cause inflation. This view was backed up by a substantial body of empirical evidence. They would therefore argue that to reduce inflation, the growth in the money supply needs to be controlled.

Monetarists vary in their precise beliefs on expectations. Some believe that expectations adjust so quickly that any policy change will immediately be taken into account by people, and there will therefore be no short-term adjustment. This school of Monetarism is known as 'rational expectations'. More moderate Monetarists accept that there may be an adjustment period, and so policy changes may have temporary or short-term effects on the level of output.

Perhaps one of the best known quotes from Friedman's work is that:

"Inflation is always and everywhere a monetary phenomenon"

This quote is perhaps the best indication of the reason why Monetarists are called Monetarists!

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