Definition
A monetarist is an economist who holds the belief that inflation is usually the result of too much money in circulation, and that the economy’s stability can be ensured by controlling the money supply. Monetarists advocate for monetary policies and reject fiscal policy as a means of regulating the economy. This school of thought gained prominence through the work of economist Milton Friedman.
Phonetic
The phonetic pronunciation of the word “Monetarist” is: mɒnɪt(ə)rɪst.
Key Takeaways
Three Main Takeaways About Monetarism
- Money Supply Impact: Monetarists believe in the strong impact of the money supply on a nation’s economic situation. They argue that variations in the money supply are the main determinant of national income and economic fluctuations.
- Control of Inflation: Monetarists put great emphasis on controlling inflation which they see as the result of too much money in the system. They propose tight control over money growth to keep inflation in check.
- Minimal Government Intervention: Monetarism advocates for minimal government intervention and believes in the self-regulating nature of markets. They favor policies that limit government and give the market more control, such as liberalization, deregulation, and privatization.
Importance
The term “Monetarist” is important in business and finance as it pertains to a school of thought that emphasizes the role of governments in controlling the amount of money in circulation. Monetarists assert that variations in the money supply have major influences on national output in the short run and on price levels over longer periods. Economic policies guided by the Monetarist theory can significantly impact inflation rates, employment levels, and business cycle phases. Central banks often adopt monetarist principles to maintain financial stability and foster sustainable economic growth. Understanding this term is crucial for comprehending economic policy decisions and their effects on the overall economy.
Explanation
Monetarists are economists who place a high degree of importance on the role of money and monetary policy in shaping macroeconomic realities. They fundamentally believe that controlling the amount of money in an economy is the most effective way of stabilizing the economy and fostering growth. They advocate for limiting the supply of money to match the potential rate of economic growth, which in turn can help control inflation. This school of thought argues that managing the money supply is a more effective way of ensuring economic stability than methods focused on controlling interest rates or fiscal policy.The primary use of monetarist theory is to guide monetary policy actions by central banks. Major tenets of monetarism include the belief that variations in the money supply have major impacts on national output in the short run and the price level over longer periods, and that objectives of monetary policy are best met by targeting the growth rate of the money supply. For instance, if a central bank forecasts higher inflation, it can implement a contractionary monetary policy by reducing the money supply, which would increase interest rates and slow the economy. On the other hand, during economic downturns, a central bank can increase the money supply to boost activity. Thus, Monetarism’s core use is to provide a framework for managing an economy through monetary control.
Examples
1. Central Bank Monetary Policy: One of the most common real-world examples of monetarism is the actions of central banks, such as the Federal Reserve in the United States. Central banks control the money supply, aiming to influence economic conditions by raising or lowering interest rates. This is a direct application of monetarist principles. If the economy is growing too fast and inflation is a concern, the central bank may raise interest rates to reduce the money supply. Conversely, if the economy is in a slump, the central bank might lower interest rates to increase the money supply and stimulate economic activity.2. The United Kingdom in the 1980s: During the Thatcher government, the UK followed monetarist policies to manage inflation. This was done by controlling the rate of growth of the money supply. Despite facing initial recession and high unemployment, this led eventually to a period of economic stability and growth.3. The Volcker Shock in 1979: Named after Federal Reserve chairman, Paul Volcker, this was a key moment where the Federal Reserve showed its commitment to the monetarist policies. To curb the high inflation of the 1970s, the Federal Reserve hiked the federal funds rate to its highest point in history – 20% in June 1981. By tightening the monetary policy, the Federal Reserve managed to break the back of inflation, but it also led to a significant recession. This is a clear example of the use and impact of monetarist policies.
Frequently Asked Questions(FAQ)
What is a Monetarist?
A monetarist is an economist who holds the strong belief that the economy’s stability is heavily dependent on the amount of money in circulation. They argue that variations in the money supply have major influences on national output in the short run and the price level over longer periods.
What does a Monetarist believe in?
Monetarists believe that controlling the money supply is the most effective way of regulating economic activity and that policy decisions should focus on maintaining price stability. They also believe that markets are generally competitive and stable, and should be left to operate without intervention as far as possible.
What are the key principles of Monetarist theory?
Monetarist theory asserts that controlling the supply of money directly influences inflation. If the money supply grows too quickly, the rate of inflation will increase; if the growth of the money supply slows, then inflation will decrease.
Who is the most notable Monetarist?
The most notable monetarist is Milton Friedman, who was awarded the Nobel Prize in Economics in 1976. His work emphasized the importance of monetary policy in controlling inflation and fostering economic growth.
How does Monetarism differ from Keynesian economics?
Unlike Keynesians, who believe that the government should actively intervene in the economy to correct economic downturns, Monetarists argue that economic intervention often does more harm than good and that a steady and controlled increase in the money supply is the key to economic stability.
What policy tools do Monetarists advocate for?
Monetarists primarily advocate for monetary policies. They suggest that central banks, like the Federal Reserve in the U.S., should control inflation by manipulating the money supply, primarily through mechanisms like adjusting interest rates and reserve requirements.
What is the impact of Monetarism on the economy?
Monetarists argue that a steady and controlled increase in the money supply can ensure price stability and foster economic growth. However, excessive growth in the money supply can lead to the devaluation of currency and inflation.
How is Monetarism applied in real-world policy?
Central banks often use monetarist principles to guide their decisions on interest rates and other monetary policies. For instance, if they see inflation is rising, they may decide to increase interest rates to reduce the money supply and slow down the economy.
Does Monetarism guarantee economic stability?
While Monetarism provides clear principles to guide policy decisions, it does not guarantee economic stability. Other factors, such as global economic conditions and domestic fiscal policies, can also have a significant impact on the economy.
Related Finance Terms
- Friedman’s K-percent Rule
- Monetary Policy
- Inflation Targeting
- Quantity Theory of Money
- Central Banking
Sources for More Information
