What are the characteristics of Monetarism, and how did it come to dominate economic policy?

Topics: Inflation, Monetary policy, Macroeconomics Pages: 3 (869 words) Published: April 3, 2014

What are the characteristics of monetarism, and how did it come to dominate economic policy?

Monetarism was an “important set of ideas that did emerge from the transatlantic non liberal network during the 1950’s and 1960s.” [Jones, 2012]

Monetarism is a mixture of theoretical ideas, philosophical beliefs, and policy prescriptions. Monetarism is based on the belief that the economy is inherently stable and that markets work well when left to itself. Therefore Government intervention can often destabilize the economy. Therefore one of the main characteristics of monetarists is having a Laissez faire economy. Laissez faire is a doctrine opposing governmental interference in economic affairs beyond the minimum necessary i.e. maintenance of peace and property rights. This means that monetarist economists' believe in the working of the private sector and market forces to stabilize the economy and are thus not a source of instability in the economy. They argue that the private sector is self-adjusting and tends to stabilize the economy by absorbing shocks. Instead they contend that it is the government sector that is the source of instability through instabilities in the money supply. They believe that money supply has a dominant effect on real output and price level in the short run, and on price level in the long run, fluctuations in the money supply lead to fluctuations in these macroeconomic variables. Moreover, the government, by changing the money supply, interferes with the normal workings of the self-adjusting mechanism of the private sector. In effect, the absence of money supply fluctuations would make it easier for the private sector mechanism to work properly.

The rise of the popularity of monetarism picked up in politics when the Keynesian school of thought was unable to explain or fix the problems of rising unemployment and inflation, which should contradict each other if the Phillips curve which was largely followed at the time was to...
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