What Is a Monetarist?

Modern monetaryism is also known as "modern monetary quantity theory". A school of contemporary western economics that originated in the United States in the 1950s and 1960s. The main founder is Milton Friedman of the University of Chicago. The school appeared in anti-Keynesian style and based on modern money quantity theory as the theoretical basis. It emphasized that changes in the money supply are the most fundamental reasons for changes in price levels and economic activities. It advocates that the state should not intervene except to control the money supply. Economic life. Since the publication of Keynes's General Theory of Employment, Interest, and Currency in 1936, Keynesian economic thought has ruled the West for half a century, but by the 1970s, capitalist countries had experienced "stagflation" and various anti-Keynesian thoughts have emerged Modern monetaryism came to the stage in this historical context. The origin of the thought of modern monetarism is the early theory of quantity of money and Keynes's theory of flow preference. Modern monetarism is but a "hybrid" of these two theories. ^[1]

Modern monetarism

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Modern monetaryism is also known as "modern monetary quantity theory". A school of contemporary western economics that originated in the United States in the 1950s and 1960s. The main founder is Milton Friedman of the University of Chicago. The school appeared in anti-Keynesian style and based on modern money quantity theory as the theoretical basis. It emphasized that changes in the money supply are the most fundamental reasons for changes in price levels and economic activities. It advocates that the state should not intervene except to control the money supply. Economic life. Since the publication of Keynes's General Theory of Employment, Interest, and Currency in 1936, Keynesian economic thought has ruled the West for half a century, but by the 1970s, capitalist countries had experienced "stagflation" and various anti-Keynesian thoughts have emerged Modern monetaryism came to the stage in this historical context. The origin of the thought of modern monetarism is the early theory of quantity of money and Keynes's theory of flow preference. Modern monetarism is but a "hybrid" of these two theories. ^[1]

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The monetary policy of the Monetary School includes six aspects: the ultimate goal of monetary policy, the intermediate goal, the transmission mechanism of monetary policy, the tools of monetary policy, the norms of monetary policy, and the effects of monetary policy.

1. The ultimate goal of monetary policy. Modern monetaryism believes that the primary goal of monetary policy should be to maintain the stability of prices, and other matters such as full employment and economic growth should be left to the market's "internal stability" to solve.

2. Intermediate goals of monetary policy. The monetary school regards the money supply as the intermediate goal of monetary policy.

3. Monetary policy tools. Friedman and other manpower owners open market business, they oppose deposit reserve and rediscount policy, and regard open market business as the only effective monetary policy tool. The reason is that open market operations have advantages not found in the other two policy tools.

4. Monetary policy transmission mechanism. The monetary school believes that the transmission mechanism of monetary policy mainly does not affect investment and income indirectly through interest rates, but directly affects expenditures and income through changes in the actual balance of money. It can be expressed as: M E I Y.

5. The effect of monetary policy. One of the main problems faced by monetary policy makers is that the economic response to policy changes has a long time lag and is prone to change, and the economic forecasting technology is low. Monetarists find these problems difficult to overcome. Generally speaking, the use of fixed currency rules is much better than the discretionary monetary policy. They believe that fixed currency rules are optimal even when the central bank realizes its primary responsibility for stabilizing the economy and adjusts its actions. of.

In addition to the above points, the monetary policy content of the monetarian school is the most important of its monetary policy, that is, the "single rule" monetary policy specification. Monetarism strongly opposes the Keynesian "camera choice" theory of monetary policy operation, and proposes that "single-rule" monetary policy should be implemented so that currency does not become the source of economic fluctuations, thereby providing a stable monetary environment for economic development. The so-called "single-rule" monetary policy is a monetary policy that excludes factors such as interest, credit flows, and excess reserves, and uses a certain amount of money supply as the only distributive factor. Friedman believes that, in order to maintain price stability, the state should minimize its intervention in economic life and avoid possible negative effects of monetary policy on economic operations. To keep unemployment and economic growth at the "natural unemployment rate" and moderate growth rates, it is necessary to control the money supply, maintain a stable money growth rate, and fix the annual growth rate of money supply to the expected economy for a long time. The growth rate is basically consistent.

The monetary policy proposition of the single rule of modern monetaryism is based on the following two points: First, they believe that the economy itself has an automatic adjustment function. Without the central bank's policy actions designed to stabilize the economy, output can be automatically Achieve full employment output levels. Theoretically, the economy will exhibit an inherent self-regulation mechanism. Over time, it can automatically eliminate the deflation and inflation gap. This mechanism stems from the elasticity of wage and price levels. Second, they believe that the camera effort to manipulate the total needs of society is not working because of the time lag of monetary policy and the uncertainty in economic life. They also believe that this kind of selective monetary policy will not help stabilize output and employment, and may lead to severe inflation.

The "single rule" proposed by monetarism has been severely criticized by the Keynesian school. The Keynesian thinks that Friedman's emphasis on the importance of currency is too much, completely negating the initiative of the central bank. They point out: "People who are active should not succumb to the rules." Friedman's "single rule" theory presupposes the assumption that economic fluctuations are entirely monetary phenomena. In fact, there are many reasons for economic fluctuations, both monetary and non-monetary, and money supply is just one of them. It can be seen that under the gold standard, although the money supply is completely automatically adjusted by metal currencies, economic fluctuations still occur frequently. Therefore, we cannot simply attribute economic fluctuations to a monetary phenomenon. Overthrowing this theoretical foundation, the "single rule" theory of monetary policy operation is self-defeating. Moreover, from the practice of recent decades, Friedman's theory itself has not been able to shake the economies of many countries out of the problem of rising prices. Therefore, monetary rules serve as a guiding principle for central banks at best.

In short, the main monetary policy propositions of modern monetarism are: because the demand for money is very stable, and the money supply is completely determined exogenously by the central bank; and the uncertain factors in economic life make the choice of monetary policy ineffective Therefore, the central bank should pursue a "single-rule" monetary policy, which uses open market operations to maintain a constant growth in the money supply in order to achieve the policy goal of price stability.