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Monetarism

Candlefocus Editor
Monetarism received considerable attention from economists and policymakers in the second half of the twentieth century, and although the focus of discussion has shifted to other macroeconomic theories, the core ideas of monetarism remain pertinent to the modern economy. In its simplest form, monetarism suggests that governments should attempt to keep the money supply growing at a pre-determined rate, with the central bank adjusting the money supply as needed to ensure that it matches the target. This could be done through quantitative easing (QE) or by lowering interest rates in order to incentivize borrowing and stimulate spending.

The theory is based on the belief that too much money in circulation will lead to inflation, while too little money will lead to a deflationary spiral of reduced spending and investment – both of which a monetarist government seeks to avoid. For example, if the government sets a monetary policy goal of 5% annual inflation and the rate of inflation is 6%, the government may decide to tighten monetary policy by increasing the money supply at a lower rate. This, in turn, would reduce the rate of inflation.

Monetary policy with its roots in monetarism led to what has been described as “special period” of macroeconomic policies during the 1980s and 1990s. Generally, these policies stressed the importance of price stability and sought to promote economic growth and fight inflation. While the results were mixed, it can be argued that the relative success of these policies was due in part to the emphasis on controlling the money supply growth and reducing inflation.

Overall, monetarism remains an important part of macroeconomic theory and analysis, providing important insights into the role of monetary policy and its potential effects on aggregate demand and economic growth. While the specific tools used in implementing a monetarist policy may have changed over the years, the core principle remains consistent: the government should attempt to control the money supply growth and promote price stability in order to encourage economic activity.

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