Documente Academic
Documente Profesional
Documente Cultură
Monetarism
OnlineTexts.com
p. 1
Monetarism
Monetarism is an economic school of thought that stresses the primary importance of the money supply in determining nominal GDP and the price level. The "Founding Father" of Monetarism is economist Milton Friedman.
OnlineTexts.com
p. 2
Characteristics of Monetarism
1. The theoretical foundation is the Quantity Theory of Money. 2. The economy and financial markets are inherently stable. 3. The Fed should be bound to fixed rules in conducting monetary policy. 4. Fiscal Policy is often bad policy. A small role for government is good.
OnlineTexts.com p. 3
OnlineTexts.com
p. 4
Any change in M1 will impact P Y (nominal GDP). Changes in the money supply are the dominant forces that change nominal GDP.
OnlineTexts.com p. 5
OnlineTexts.com
p. 6
'M' and 'P' are the only variables in this equation that change in the long run. In the long run, changes in the money supply only cause inflation.
OnlineTexts.com p. 7
OnlineTexts.com
p. 8
Fiscal Policy
Because Monetarist dislike big government and tend to trust free markets, they do not like government intervention and believe that fiscal policy is not helpful. Where fiscal policy could be beneficial, monetary policy can do the job better. Automatic stabilizers are sufficient sources of fiscal policy.
OnlineTexts.com p. 10
OnlineTexts.com
p. 11
Velocity
9.0 8.0 7.0 6.0 5.0 4.0 3.0 1970-2003
Recent evidence suggests that velocity has been unstable and unpredictable since the 1980s.
1991 1994 1997 2000 2003
1970
1973
1976
1979
1982
1985
1988
OnlineTexts.com
p. 12
GDP
M1
The lack of correlation between M1 and nominal GDP also depicts the instability of velocity.
OnlineTexts.com
p. 13
OnlineTexts.com
p. 15
Tie monetary policy to rules Fiscal policy is not useful. AS curve has a steep slope. Economy is inherently stable.
Give policymakers discretion. Fiscal policy may be useful. Economy can be unstable. AS curve can be flat.
OnlineTexts.com
p. 16