Monetarism

The term monetarism ( from the Latin moneta, coin ',' mint ') is an economic theory and economic policy concept that was developed in the 1960s and 1970s, especially by Milton Friedman as an alternative to demand-oriented Keynesian economics. He takes up again already in the 1930s conceived theories of supply-side economics.

See monetarists in the regulation of the money supply is the most important control variable to control the economy sequence: " Money matters " - " It depends on the money supply ." They build on the long -term view of the neoclassical notion of a basically stable economic processes. An excessive expansion of the money supply leads to inflation, therefore, excessive braking of monetary growth to deflation. Short-term interventions by the state for selective control of the economy will be rejected. Monetarism is based on a relatively stable demand for money.

History

Monetarism has its roots mainly in the quantity theory of Irving Fisher. Fisher saw a close connection between the monetary and the real sector of an economy. The early work of Friedman in the field of consumer theory eventually led to a fundamental critique of the Keynesian consumption function. Friedman criticized an allegedly unwarranted fixation on the current income as a central factor in consumer spending and put forward the theory that consumption of the expected lifetime income depends.

In the late 1940s, in confrontation with the Keynesian monetary theory was also a counter position to Keynes that led to the rehabilitation of the quantity theory. In the 1950s, Friedman examined on the basis of empirical measurements of money demand and money supply in American history and came to the finding that the crisis of 1930 was caused by a worsening monetary policy. The monetarist position gained influence, as a result of oil price shocks occurred at the same time unemployment and inflation, especially since the early 70s. In addition to Milton Friedman as its best known representatives are the most prominent monetarists Karl Brunner, Allan H. Meltzer, Phillip Cagan and Bennett T. McCallum.

1974 was the German Bundesbank was the first central central bank in the world via a control money supply. For the economic history of the Federal Republic this turnaround in monetary policy was of paramount importance. The concept of the Deutsche Bundesbank for safeguarding the internal value of the currency was a medium-term oriented monetary control with the aim to control the price increase over the control of the money supply. This should be done indirectly by influencing the money market conditions. Behind this control concept is the idea of allowing the monetary side such funding processes that lead to growth of potential output in the medium term. The money is intended to grow as fast as the production potential, as it can lead to economic growth weakness in lower growth. As points of reference for a stability- oriented monetary policy, the Bundesbank took advantage of the production potential, the price level and the velocity of money. From these basic elements of monetary policy, the optimal money growth rate should be determined. These used the Bundesbank, the quantity theory of money.

Development and characteristics

The position of monetarism developed into a controversy with Keynesianism. The range of contentious issues ranging from the definition of the concept of money and the explanation of the money creation to the factors determining the value of money and the processes of money and effects in the monetary policy of the effective strategies to the efficiency of different instruments.

Sets If the term monetarism closely, so it is merely a new name for the quantity theory. Thomas Meyer has, however, already in 1975 tried to compile the allegations the monetarists clearly.

Following the quantity theory of money, the nominal income is primarily determined by monetary factors. Money supply changes as the dominant determinant of income growth are fundamental components of monetarism.

The quantity equation is:

( Money supply M * V = velocity of money price level P * national income Y)

The theory suggests that changes in the velocity v are so low that one could neglect it, so that v representing a constant size. How often a lot of money x will be related to transactions within a time period y, depended on the demand for money. A part of monetarism is the rule of constant money growth, ie if the demand for money detrended really is constant, a constant growth rate of the money supply would lead to a constant growth rate of income.

From monetarist perspective, the transmission on two interest rate elasticities, the interest elasticity of money demand and the interest elasticity of aggregate demand is concentrated. The first elasticity is explained in the context of the liquidity preference theory of money demand, the second by the relative cost of borrowing, ie the cost of credit in relation to the total investment costs.

According to the monetarist approach to economic agents to increase their spending when the real money supply increases and thus the notional interest rate for cash holdings is reduced. The interest rate for the demand for money ( cash balances ) falls, while income from other investments remain constant.

In fact, the term " interest " is seen as problematic because of the interest is a variety of long - and short-term interest rates. There are no relevant method to combine these interest rates to a single size. The second difficulty is that not all interest rates, which should be included in the interest rate, can also be observed in the market. For example, for the economic decisions of the expected real interest rate of importance, which can not be observed on the market. Therefore, the monetarists believe that the money supply for practice a much better performing than the benchmark interest rate. Many monetarists assume that the nominal interest rate only gradually decreases when the money supply is increased. He soon climb back to its former level, and climb over it because of the Fisher effect even.

Monetarists therefore see the expected real interest rate to be fairly stable. Thus, one of the factors which may cause fluctuations in the demand for money, namely changes in the expected real interest rate, for the monetarists seem to be far less important than for the Keynesians. Another reason why monetarists accept the demand for money as stable, is the fact that they consider the Ausgabenneignung and thus the expected real interest rate and the demand for money as stable.

The monetarist argument is that the dynamics of the private sector is basically stable and is due to a stable demand for money and an unstable supply of money. Because of their faith in the stability of the private sector and the lack of need for government intervention, there is little reason to question the development of various sectors in the focus of interest for the monetarists. Therefore, the monetarists be based on the assumption of a well-functioning capital market. This leads to a distinction between the relative prices, which are influenced by the situation in the different areas, and the general price level, which is influenced by the money supply.

A central thesis of the monetarists is based on the aggregated method of price-level viewing. Follow the changes in aggregate demand back on price and output changes. In this approach, the pricing of a single industry has no effect on the general price level, but affect only the relative prices. The complex reality is called using a simplistic system, also called " small structural model " represented.

After the monetary policy strategy of the monetarists, the direction and strength of the monetary policy is described by a variable that can be precisely controlled by the central bank. In addition, should have a high correlation with the intermediate target variables exist (eg money ). However, this would represent the amount of money the best indicator because it can be predicted on the basis of changes in income.

Another component of monetarism is the constant money growth, which is closely related to the quantity theory, and the assumption that the demand for money is constant. This would in turn mean that a constant growth rate of the money supply would lead to a constant growth rate of income.

A further feature of monetarism is the aversion to government intervention. The fiscal policy is assumed no great effectiveness by monetarist view. When financing through taxes, there is a large crowding out private investment, which may be completely in the extreme. In the financing of expenditure on the creation of money is in truth no fiscal policy but in truth from a monetary policy that has already above-mentioned effects. There are also so-called time- lags in both fiscal as well as monetary policy measures.

Implications for Economic Policy

Impact on economic policy, the monetarist idea that the Phillips curve is based on real variables and that therefore there was only a very limited interdependence between inflation and unemployment. It is argued with the three already discussed monetarist ideas: quantity theory, the stability of the private sector and the constant money supply growth rate, ie an increase in the money supply affecting not real income, but only the prices, because it alters only the wage level.

Friedman argues that the negatively sloped Phillips curve is merely due to a kind of money illusion, ie that workers adjust their supply and their wage demands in the expected price level. Since this is only relevant in the short term, there is no permanent trade-off between inflation and unemployment and the long-term Phillips curve is usually vertical.

Reception

The founded by Milton Friedman monetarism, the monetary policy in the center. It is about the difference between money and credit, and above all to that which is regarded as the price of money. The Keynesian approach considers the interest rate as the price of money, whereas the quantity theoretical approach considers the interest rate as the price of the loan and the inverse of the price level as the price of money.

In contrast, Keynesians argue that economic agents hold more than their optimum quantity of money and therefore buy securities to compensate for the marginal returns.

Another difference between Keynesian and monetarist transmission process is due to the different viewing of assets. Monetarists define an increase in the money supply as a relative increase in the cash management of business entities compared to holdings of securities and all forms of real capital. To bring the marginal returns back into balance, using the economic agents to the extra money on hand, in addition to purchase securities, capital and consumer goods.

The Keynesians assume, however, that an increase in the money supply usually but not only the investments that affect consumption. They assume that the private sector is subject to unpredictable fluctuations, which are mainly due to long-term prospects of the company.

Another point of contention in the debate between monetarists and Keynesians is the price level viewing.

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