Monetarism

Definition

Monetarism is an economic theory that emphasizes the role of governments in controlling the amount of money in circulation. It asserts that variations in the money supply have major influences on national output in the short run and on the price level over longer periods. This theory connects closely to various phases of the international monetary system, influencing monetary policy decisions during the Bretton Woods era and its aftermath.

5 Must Know Facts For Your Next Test

1. Milton Friedman, a prominent economist, is often credited as the leading figure of monetarism, arguing that changes in the money supply drive economic cycles.
2. During the Bretton Woods era, monetarist policies were largely overshadowed by Keynesian economics, which emphasized government spending to manage economic fluctuations.
3. The shift toward monetarism in the late 1970s led to a new approach to combating inflation, focusing on controlling the growth rate of money supply rather than adjusting interest rates directly.
4. The post-Bretton Woods era saw many countries adopt monetarist principles, leading to significant changes in monetary policies globally, including deregulation and targeting of inflation.
5. Critics of monetarism argue that it oversimplifies the relationship between money supply and economic output, especially in times of financial crises when other factors also play a crucial role.

Review Questions

• How did monetarism challenge the prevailing economic theories during its emergence?
  • Monetarism challenged Keynesian economics, which had dominated post-World War II policy-making by emphasizing fiscal stimulus through government spending. Monetarists argued that controlling the money supply was more effective in managing inflation and economic growth. This shift led to debates about monetary policy's role, ultimately influencing central banks' approaches during both the Bretton Woods and post-Bretton Woods eras.
• Discuss the impact of monetarist policies on inflation control in the post-Bretton Woods era.
  • In the post-Bretton Woods era, many countries adopted monetarist principles as a response to high inflation rates during the 1970s. Central banks began focusing on controlling money supply growth rather than solely adjusting interest rates. This shift aimed to stabilize prices and curb inflation, leading to a new monetary policy framework that prioritized inflation targeting as a key objective for economic stability.
• Evaluate how monetarism has influenced contemporary monetary policy debates in global economies.
  • Monetarism has left a lasting legacy on contemporary monetary policy debates by highlighting the importance of money supply management and its effects on inflation and output. In recent years, central banks have increasingly considered these principles when formulating policies. The ongoing discussions surrounding quantitative easing and interest rate adjustments reflect monetarist ideas about the significance of maintaining stable price levels while navigating complex economic challenges. This influence demonstrates how historical economic theories continue to shape current practices and policy decisions.

Related terms

Money Supply: The total amount of money available in an economy at a specific time, which includes cash, coins, and balances held in checking and savings accounts.

Phillips Curve: A concept that illustrates the inverse relationship between inflation and unemployment, suggesting that lower unemployment can lead to higher inflation and vice versa.

Inflation Targeting: A monetary policy framework where a central bank aims to keep inflation within a predetermined range, using interest rates and other tools to achieve this goal.