Definition
A monetarist is an economist who holds the belief that the economy’s performance is determined primarily by changes in the money supply. They assert that variations in the money supply can have major impacts on things like output and prices over time. Thus, monetarists advocate for monetary policy to control inflation and stabilize the economy.
Key Takeaways
- Monetarism is a school of thought in economic theory that emphasizes the role of governments in controlling the amount of money in circulation. It contends that changes in money supply have major influences on national output in the short run and the price level over longer periods and that objectives of monetary policy are best achieved by targeting the growth rate of the money supply.
- Central to monetarism is the assertion that the health of an economy can generally be best determined by the growth or contraction of its money supply. It also posits that inflation is caused predominantly by an increase in the money supply, and conversely, can be mitigated by controlling this supply.
- Monetarist policies came to prominence in the 1970s and 80s with economists like Milton Friedman championing the approach. However, in today’s climate, most central banks incorporate monetarist ideas to some degree but also take into account other economic indicators to determine their policies.
Importance
The finance term Monetarist is important because it pertains to a school of economic thought that emphasizes the role of governments in controlling the amount of money in circulation.
Monetarists assert that variations in the money supply have major influences on national output in the short run and on price levels over longer periods.
This principle signifies the importance of monetary policy in influencing economic and price stability, suggesting that significant changes in money supply can lead to significant changes in economic output.
Therefore, understanding Monetarism can guide policymakers in taking appropriate measures to control inflation, reduce unemployment, and maintain a healthy economic environment.
Explanation
Monetarists are economic theorists who prioritize the role of governments in controlling the amount of money in circulation. Their primary focus is on the management of the money supply and interest rates as a method for ensuring economic stability and growth. The essence of monetarism is in its assertion that variations in money supply has major influences on national output in the short run and on price levels over longer periods.
Monetarists assert that objectives of monetary policy are best met by targeting the growth rate of the money supply rather than by engaging in discretionary monetary policy. Monetarism gained prominence in the ’60s and ’70s, guided by the teachings of economist Milton Friedman, who argued against the then prevalent Keynesian economics. He claimed that government intervention can often do more harm than good and can lead to inflation and economic crisis.
In essence, the purpose of monetarism revolves around promoting low inflation, which monetarists believe leads to lesser economic instability and promotes long-term economic growth. Control on supply of money can, according to monetarist principles, curb inflation, stabilize the economy, and boost consumer and investor confidence. Remaining prevalent in certain areas like central banking, monetarism continues to function as a guiding principle in economic policy design and decision-making.
Examples of Monetarist
Federal Reserve Strategies (USA): The Federal Reserve, the central bank of the United States, has often used Monetarist principles to guide its actions. It closely monitors the money supply and adjusts interest rates to tackle inflation or stimulate the economy. For example, during the 2008 financial crisis, the Fed reduced interest rates and bought securities from banks in order to increase liquidity and stimulate economic growth.
Volcker Shock (USA, 1979): Paul Volcker, the then-chairman of the Federal Reserve, used the principles of Monetarism to combat persistent inflation in the American economy during the late 1970s. He tightened money supply dramatically – a move known as the “Volcker Shock”. This resulted in a short-term recession, but ultimately brought down inflation.
The UK’s Monetarist Experiment (1980s): In the 1980s, under Prime Minister Margaret Thatcher, the UK government implemented Monetarist economic policies, which aimed to reduce inflation by restricting growth in the money supply. This policy had both proponents and critics: while it succeeded in controlling inflation, it also led to a recession and significant job losses.
Monetarist FAQs
What is Monetarist Theory?
The monetarist theory is an economic concept which proposes that variations in the money supply have major influences on the national output in the short run plan and the price level over longer periods. The theory also asserts that the objectives of monetary policy are best met by targeting the growth rate of the money supply rather than by engaging in discretionary monetary policies.
Who is the main proponent of Monetarist Theory?
Milton Friedman is often considered as the leading proponent of Monetarist Theory. His views countered those of the long-dominant Keynesian economics and gained increasing importance in the late 20th and early 21st centuries.
What is the relationship between Monetarist Theory and Inflation?
From a monetarist’s viewpoint, inflation is always and everywhere a monetary phenomenon. Monetarists believe that excessive growth of the money supply is inflationary, and the central bank’s responsibility is to maintain price stability by regulating the money supply.
What is Monetarism vs Keynesian?
Monetarism and Keynesian Economics are both schools of thought in economics that have different approaches to interpreting the economy. Monetarism emphasizes the role of governments in controlling inflation by restricting the size and growth rate of the money supply, while Keynesian economics involves the belief that demand is influenced by a host of economic decisions—both public and private—and sometimes behaves erratically.
What are some criticisms of the Monetarist Theory?
Some of the key criticisms against Monetarist Theory include: it gives too much importance to the role of money in the economy, it is too simplistic in its monetary rule approach, disregarding other factors influencing the economy; and, it underestimates the complexity of managing the money supply.
Related Entrepreneurship Terms
- Friedman’s Quantity Theory of Money
- Central Bank
- Inflation Control
- Interest Rate Management
- Liquidity Preference
Sources for More Information
- Investopedia: This is a trusted source for learning about financial concepts, including monetarism.
- Encyclopaedia Britannica: This long-standing information source provides reliable info on a wide range of topics, including economics and finance.
- The Library of Economics and Liberty: This is an online library dedicated to resource materials related to economics and finance.
- International Monetary Fund: The IMF provides resources and articles about global macroeconomic issues, financial policies and financial terms such as monetarist.
