1---
 2meta: 
 3  date: false
 4  reading_time: false
 5title: "Monetarism"
 6date: 2023-10-05
 7description: "An economic theory emphasizing the central role of the money supply in determining nominal incomes and economic stability."
 8tags: ["Monetarism", "Economic Theory", "Money Supply", "Rational Expectations"]
 9---
10
11## Background
12
13Monetarism is an economic theory that stresses the influence of changes in the money supply on national output in the short run and on the price level over longer periods. It posits that the best way for a government to foster stable economic growth is to manage the rate at which the money supply grows, in alignment with the growth of aggregate supply and a target rate of inflation. 
14
15## Historical Context
16
17Monetarism gained prominence in the economic debate during the latter part of the 20th century, largely due to the work of key figures like Milton Friedman. It emerged as a critique and alternative to Keynesian economics, which was traditionally dominant. Especially during the 1970s, monetarist ideas provided the basis for policies aimed at controlling inflation amid economic turmoil and stagflation.
18
19## Definitions and Concepts
20
21Monetarists argue that variations in the supply of money have major influences on output in the short term and the price level over longer periods. Fundamental concepts of monetarism include:
22
23- **Quantity Theory of Money**: The theory that changes in the money supply directly affect prices and subsequently nominal income levels.
24- **Rational Expectations**: The notion that individuals and firms make decisions based on their rational outlook, adapted according to historical data and anticipated policy moves, mitigating the effects of unanticipated policy actions.
25
26## Major Analytical Frameworks
27
28### Classical Economics
29   
30Classical economics focuses on long-term economic growth and on adjusting to equilibria but generally does not emphasize the role of the money supply as strongly.
31
32### Neoclassical Economics
33   
34Neoclassical economics, while recognizing the short-term non-neutrality of money, extensively modeled the long-term neutrality of money.
35
36### Keynesian Economic
37   
38Keynesian economics traditionally emphasized the role of fiscal policy and demand management over the strict control of money supply, often competing directly with monetarist theories in macroeconomic policy discourse.
39
40### Marxian Economics
41   
42Marxian economic theory places more focus on the role of production, labor, and capital within a market system rather than focusing narrowly on the money supply.
43
44### Institutional Economics
45   
46Institutional economics turns attention to the role institutions play in shaping economic behavior, going beyond the money supply components integral to monetarism.
47
48### Behavioral Economics
49
50Behavioral economics scrutinizes the bounded rationality of individuals which conflicts with monetarist advocates' assumptions of rational expectations.
51
52### Post-Keynesian Economics
53
54Post-Keynesian approaches also critique the assumptions about immediate realigned equilibriums painted by monetarists, often focusing on long-term factors of fiscal policy and market frictions.
55
56### Austrian Economics
57
58Despite a shared suspicion of government intervention, Austrian economics places greater emphasis on the heterogeneity of individual actions and business cycle theories distinct from monetarist perspectives on the money supply.
59
60### Development Economics
61
62Development economics might utilize principles segregating monetary policy from the wider development issues like capitalization rates, investment influx, or policies on aggregated supply bolstering.
63
64### Monetarism
65
66Finally, monetarism directly referees to the insistence on measurable monetary audits and policy efficiences attending âdaily systemic stabilites and aggregate economic solidifications.
67
68## Comparative Analysis
69
70Comparative analysis of monetarism vis-a-vis other economic theories primarily revolves around contrasting its focus on the money supply with other theories' emphasis on different driving economic factors. The effectiveness and consequences of by strictly controlling the money supply over sustained Keynesian fiscal intervention are recurrent themes.
71
72## Case Studies
73
74- **United States (1980s)**: Under the Reagan administration, monetarism influenced policies to curb high inflation from preceding periods, pivoting primarily around controlling money supply.
75- **United Kingdom (1979-1984)**: The Thatcher government attempted monetarist policies which witnessed various levels of success afflicted by structural and institutional rigidities.
76
77## Suggested Books for Further Study
78
79- *A Monetary History of the United States* by Milton Friedman and Anna J. Schwartz
80- *Capitalism and Freedom* by Milton Friedman
81- *The Optimum Quantity of Money* by Milton Friedman
82- *Free to Choose: A Personal Statement* by Milton and Rose Friedman
83
84## Related Terms with Definitions
85
86- **Fiscal Policy**: Government strategies deploying tax and expenditure measures to influence the economy.
87- **Inflation Targeting**: A central banking policy that revolves autour target projections of inflation rates.
88- **Inflation**: The rate at which general price levels for goods and services rise.