The Monetarist Theory: Milton Friedman

Economic theories search the relationships linking changes in the notes give to changes in scotchal activity and damages. With a mixture of theoretical ideas, philosophical beliefs, and polity prescriptions, these theories can help clarify on both historic and original financial situations. For instance, the general sense of the m singletarist scheme, founded by economist Milton Friedman, foc examples on macroeconomic activities that examine the impact of changes in the money generate and of import banking.This economic school of thought theoretically challenges Keynesian economics (OnlineTexts) to contend that variations in the money supply ar the nearly significant determinants of the rate of economic growth, the behavior of the business cycle, the interior(a) output in the short run, and the equipment casualty level over extended periods of time (Investopedia). Through the developments from other theories, more laissez-faire government approaches, and the ha ndling of the quantity possibility of money, monetarism has adultally impacted and helped justify changes in pecuniary constitution and the banking system for nearly one hundred years.To fully drudge this economic theory, the history behind it and what determined its existence must be unders tood. following the Great slack, Keynesian economics of importly dominated the United States as thoroughly as countries globally. This economic theory focuse on natural spending in the rescue and its effects on output and pompousness (Blinder). Keynesians traditionally saw fiscal policy as the key ray of light for economic management, believed pecuniary policy should simply be used as a backup, and believed that the governments role was to maintain the deliverance at full employment (Biz/Ed).This theory also emphasized interest range as a objective of pecuniary policy, raising rates to inert down the economy and reducing rates to speed involvements up (Allen 283). Although the se views were the main focus for some time, many economists saw that the theory was leaving most of our economic problems unexplained. As Keynesian economics seemed unable to explain or cure the seemingly contradictory problems of rising unemployment and lump (Allen 284) economits like Milton Friedman began make different, more accurate observations.Monetarisms hold water to intellectual prominence began with publications on basic monetary theory by Friedman and other economists during the fifties (McCallum). These proposals were influential be pose of their devotion to fundamental neo immaculate principles, particularly Friedmans presidential address to the American Economic Association in 1967, published in 1968 as The Role of Monetary Policy. In this paper Friedman developed the natural-rate supposition and used it as a pillar in the argument for little government intervention and a continuous-growth-rate rule for monetary policy (McCallum).From this situation the monet arist theory drew its roots from two almost entirely opponent ideas, the hard money policies that dominated monetary thinking in the belatedly 19th speed of light, and the theories of Keynesian economics (Wikipedia). While Keynes had focused on wide-cut spending and the value stability of currency which resulted with problems based on an stingy money supply, Friedman centered on price stability acting as the equilibrium amongst supply and train for money (Wikipedia).Friedman and other monetarists began contend Keynesian ideas and strongly started to suggest that money does not matter (Wikipedia). Monetarists goals involved seeking to explain present problems while also melodic phrase to interpret historical ones. Since monetarists strongly believe that the money supply is the indigenous determinant of nominal GDP in the short run and of the price level in the long run, they stress that the control of the money supply should not be left to the discretion of aboriginal banke rs and that the focus should fault to a more laissez-faire approach for the banking system (OnlineTexts).Monetarists do not believe that the government should intervene in economic and monetary decisions by trying to manage the level of aggregate demand or pith spending (Biz/Ed). Friedman explains that if we are experiencing government deficits and must make a monetary decision, then the deficits should be financed by increasing the money supply pickably of affecting aggregate demand, and vice versa for budget surpluses.Monetarists argue that interventionist policy regarding managing lend spending result be destabilizing in the long run and should thereof be avoided. By trusting handsome markets rather than large governments, monetarists apace and simultaneously agreed that government intervention will destabilize the economy more than it will help, since intervention typically interferes in the workings of free markets and can lead to bloated bureaucracies, unnecessary soc ial programs, and large deficits (OnlineTexts).Markets will hit by working on their own since market forces will cause puffiness, unemployment and production to adjust themselves automatically and efficiently around a fixed amount of money (Milton Friedman and Monetarism). A key problem with discretionary demand management policies is the time lags, which monetarists believe make fiscal policy too difficult to use to manage the economy effectively (Biz/Ed). The best thing therefore, is to take a long-run view of price stability and use monetary policy to achieve this.Monetarists always say that where fiscal policy could be beneficial, monetary policy would do the job better. Government attempts to influence GDP and other economic measures through fiscal policy are at best ineffectual, mainly because expansionary fiscal policy plainly causes ostentatiousness (Monetarist Theory of Inflation). The monetarist theory believes that the Fed should not have discretion and rather be bou nd to fixed rules in conducting monetary policy.For example, monetarists prefer the money growth rule which states that the Fed should be required to target the growth rate of money so that it equals the growth rate of accredited GDP, leaving the price level unvarying (OnlineTexts). The relationship between largeness and money growth is virtually a one-to-one relationship, so if the economy is expected to grow at a certain percent in a given year, the Fed should allow the money supply to sum up by the uniform percent. By following this rule there will be a tight control of money and credit allowing the economy to maintain price stability (Riley).Monetarists stress incorrect central bank policy is often the root of large fluctuations in inflation and price stability, showing that the key to success is to ensure that monetary policy is credible so that peoples expectations of inflation are controlled (Riley). Friedman states at heart his academic paper, The Role of Monetary Poli cy that monetary authorities should pull out themselves by magnitudes that they can control, not by ones that they cannot (Friedman 14), which is why the quantity theory of money and other monetarist concepts are of huge importance and assistance.The quantity theory of money is a basic theoretical explanation for the link between money and the general price level. This theory helps describe how by arrogant the growth of the money supply and leaving interest rates unchanged the Fed can better control inflation and foster perpetual economic growth (Riley). This identity relates supply aggregate demand to the total value of output, and holds that changes in nominal prices reflect changes in the money supply and the f number of money (Monetarism). Monetarists assume that the velocity of money deep down the economy, or rather the average number of times a dollar is used to purchase final good or service is assumed constant or changes at a predictable rate (Wikipedia). The value of very output (GDP), or the total volume of production of goods and services, is not influenced by monetary variables (Riley) allowing monetarists to also treat GDP as a constant. feeling at the quantity of money theory equation, M*V = P*Y, where M is the rate of growth in the money supply, V is the velocity of money, P is the overall price level, and Y is the total output or GDP, one can determine that with V and Y as constants, changes in the rate of money supply will equal changes in the price level (Riley).By using this equation and theory, economists can determine and solve problems within the economy and we have seen this throughout history. The monetarist theory can effectively explain the deflationary waves of the late 19th Century, the Great Depression, and the stagflation period beginning in the early 1970s (Wikipedia). Monetarists argue that there was no inflationary sound in the 1920s, while Keynesians argue that there was significant asset inflation and unsustainable g rowth.Monetarists claim that the contraction of the M1 money supply during 1931-1933 is to blame for the Great Depression and if the Fed had provided sufficient liquidity to make up for the insufficient money supply, then that financial crisis would have be avoided (Pettinger). In comparison, the increase in inflation rates throughout the 1970s led many to take on monetarist policies to steady the money growth (Hafer 18). Even though the sudden rise in inflation in the 1970s was related directly to inunct price shocks, there was also a similar increase in the average rate of money growth.To combat this, the Fed began adopting a monetarist political program and monetary targets were effectively used in official policy outline (Hafer 18). Later in the 1980s President Reagan imposed strict monetarist policies of confine money stock growth in an effort to stop the dramatic rise of inflation. At this time, the prime interest rate was at cardinal percent and unemployment reached dou ble digits. The monetarist policies Reagan proposed brought down inflation and unemployment rates, suggesting that monetarist policies were succeeding (Allen 284).Most recently in the early 1990s, John Taylor, an economics professor at Stanford, showed that U. S. monetary policy could be accurately described by relating movements in the federal finances rate to deviations in inflation from a target rate and deviations in real output growth from potential growth (Hafer 19). This Taylor rule dominates overmuch of the research on monetary policy during the past decade, both as a instance of Fed behavior and as a model to guide policy decisions (Hafer 19).While some disagreement remains, certain things are clear. Since 1990, the classical form of monetarism has been questioned because of events that have been interpreted as inexplicable in monetarist terms, generally the unhinging of the money supply growth from inflation in the 1990s and the chastening of monetary policy to stimula te the economy in the early 2000s (Wikipedia). Alan Greenspan, former chairman of the Federal Reserve, explains why the monetarist theory unfortunately had no success in combating early financial problems.He argued that the 1990s economic decay had little to do with the monetarist view of the money supply and rather was explained by a virtuous cycle of productivity and investment on one hand, and a certain degree of irrational exuberance in the investment sector (Wikipedia). Along with Greenspan, economist Robert Solow of MIT suggested that the 2001-2003 failure of the expected economic retrieval also was not attributed by monetary policy, but by the change magnitude productivity growth in crucial sectors of the economy (Investopedia).Despite both the successes and failures of the monetarist theory, in 2005 most academic specialists in monetary economics described their preference as new Keynesians (McCallum). However, even with that focus, most of the changes to Keynesian think ing that monetarists proposed are accepted today as part of standard macroeconomic and monetary analysis and most economists accept the proposition that monetary policy is more powerful and useful than fiscal policy for stabilizing the economy (McCallum).In addition, current thinking clearly favors policy rules in contrast to discretion of central banks and stresses the importance of maintaining inflation at low rates. With new Keynesian views prominent in todays society, it can be determine that it is only in the emphasis on monetary aggregates that monetarism is not being astray practiced today. Economic theories, including monetarism, are constantly changing to provide outlets for research in all areas of economics based on theoretical reason and analysis of economic problems.Despite the drastic differences between the late 19th century and todays economy, the same economic problems remain the same. We cannot put so much doubt and negativity onto monetarist views as we can be c onscious that new economic theories will continuously emerge as changes in the economy bring fresh insights and cause existing ideas to become obsolete.Throughout these changes, the same motivating force is present regarding the need to understand the economy in order to achieve societys goals. These economic theories are highly significant in finding the right monetary policy to bring about economic growth and financial stability in a country. The monetarist theory, as well as others more prominent today, will continue to be debated and well-tried in order to find answers to some of the most troubling economic questions throughout our history.