The hollowing out of monetarism: the rise of rules-based monetary policy-making in the UK and USA and problems with the paradigm change framework

Abstract

The demise of a post-war Keynesian policy paradigm of discretionary fiscal fine-tuning in pursuit of full employment is widely associated with the rise of a monetarist economic policy paradigm stressing fixed policy rules and money supply targets to secure price stability. Challenging these conventional wisdoms, and questioning the usefulness of the paradigm change framework, this article interrogates how far monetarism did replace Keynesian approaches to macroeconomic policy in the UK and USA after the 1970s. Crucial aspects of monetarism—notably the commitment to abandon stabilisation policy and shift to fixed policy rules—were overridden shortly after brief, abortive attempts to use monetarism as a governing doctrine. A paradigm lens overstates the clarity of monetarist ideas, failing to acknowledge how these were reconciled to (New) Keynesian ideas by the end of the 1980s within a pragmatic composite (the Taylor rule). The wider theoretical contribution of this article is to revisit understandings of paradigmatic change in political science and political economy. We argue that taking a paradigmatic view of economic ideas and their relationship policy orders can overstate change, overlook continuities, and overrate the efficiency of punctuated change. It also under-appreciates scope to combine ideas from different paradigmatic homes.