Monetarist View Research Articles

Ideology and the Great Depression: Monetary History Rewritten

In 1963 Milton Friedman and Anna Schwartz published A Monetary History of the United States.' book is apparently a massive, empirically based interpretation of the relationship among various components of the money supply, the total quantity of money, and the level of economic activity. It has also become the empirical basis for a monetarist revision of the history of the Great Depression of the 1930s.2 monetarist view is that the Great Depression was not a result of basic flaws in American capitalism but was rather the result of incompetent monetary policy. monetarist-revisionists argue that far from showing the need for active counter-cyclical monetary and fiscal policy, the years 1929-33 show how destablizing a government agency can be. They then go on to argue that what the years 1929-33 actually show is that in the absence of such agencies and their allegedly inevitable incompetence, unfettered capitalism is capable of sustained and uninterrupted increases in output. They further argue that much of what has happened over the last fifty years has been a consequence of an erroneous interpretation of 1929-33. As Karl Brunner has put it, The view of a radically unstable economic process perennially on the edge of serious collapse gained wide popularity and became a central element of the Keynesian

Inflation and Unemployment in an Open Economy: A Monetarist View

The notion of an inverse relationship between inflation and unemployment was a commonplace of macroeconomic policy discussions even before Brown (1955), Phillips (1958) and Lipsey (1960) presented evidence of the existence of an apparently empirically stable functional relationship between the two variables, and provided us with theoretical arguments about why we should expect it to exist.1 The theory in question was extremely simple. It amounted to the proposition that, in conditions of excess demand for labour, the price of labour might be expected to rise, and in conditions of excess supply, to fall. The relevant price was identified as some index or other of money wages, while the unemployment rate was treated as an inverse proxy for the excess demand for labour. This theory of the interaction of wage inflation and unemployment was transformed into one dealing with price inflation by postulating that prices were closely related to money wages, either by way of some form or other of a mark-up pricing, or by mechanisms associated with the pricing behaviour of profit maximising competitive firms. This model of inflation-unemployment interaction has long been discredited, not just by empirical evidence but also by theoretical arguments: instead of the Phillips curve we now have the 'expectations augmented' Phillips curve. There are a number of not always mutually compatible ways of deriving the latter relationship, but for present purposes differences of opinion on the underlying microeconomics of the function are of secondary importance, in comparison with widespread agreement about its empirical nature.2 Instead of predicting money wage inflation to be zero in a 'fully employed' economy, with prices therefore falling at the rate of growth of labour productivity, we now predict that real wages will grow at the rate of productivity change, but profess ourselves unable to say anything about the rates of money wage and price inflation that will rule in such a circumstance; we now expect excess supply to be associated, not with falling money wages and prices, but with rates of wage and price inflation that are low relative to expectations, and excess demand to lead, not necessarily

Comment on the Paper by Professor Laidler

The discussants, James Meade and Robin Matthews, have been generous, and I have no serious disagreements with them. Meade's taxonomy is ingenious and illuminating. I will take this opportunity to comment on David Laidler's position. He says, 'We are all monetarists now'. The sense in which that is true is pretty tame, a sense that would entitle many of us 'Keynesians' to say 'And we always were'. Laidler suggests that the touchstone is belief in stability of the money demand function, but such a function has always appeared in one of the equations of Keynesian theoretical and empirical models. It does not lead to monetarist policy propositions unless it takes particular form. I am sympathetic to the presumption that the behaviour represented in money demand functions is as stable as that embodied in many other structural equations of macroeconomics. That is different from asserting the stability of demand for any statistical time series labelled as 'money'. Given the changes in financial institutions, technologies, and regulations, many of them endogenous responses to market developments, it would be surprising if any monetary aggregate Mi, even though its label remains unchanged, means the same thing to its holders as it did Io or 20 or 50 years ago. Laidler does not rely on interest-inelasticity of demand for money, verticality of the 'LM' locus, as the basis for his monetarist views. Neither, ultimately, did Friedman. Laidler apparently accepts Friedman's dictum '...[No] "fundamental issues" in either monetary theory or monetary policy hinge on whether the estimated elasticity [of demand for money with respect to interest rates] can ... be approximated by zero or is better approximated byo 0i or 5 or 2,0, provided it is seldom capable of being approximated by co'.1 If monetarist propositions about the effects of monetary and fiscal policies on output and prices are at stake, the only reasonable way to make theoretical sense of this dictum is to take full employment, in the sense of cleared markets for labour and capital services, as the assumed state of the economy. But Laidler, explicitly shunning intellectual reinforcement from Monetarism II, does not take this way out. I think this leaves both Laidler and Friedman relying on empirical findings and practical judgements about how much money matters, how much other shocks and policies matter, how wise and timely policy-makers can be, how stable the economy is under constant policies, and so on. Maybe Laidler and Friedman think markets adjust to macro-economic shocks OPEC, for example faster than I think they would. Maybe from their perspective three or five 5 ears of stagflationary adjustment is quick enough so that theorists and policy-makers are best advised to regard equilibrium, the 'natural rate', as the normal state of the economy. In either case, the grounds for their monetarist policy recommendations are not the powerful theoretical propositions of

The economic consequences of monetarism: a Keynesian view of the British economy 1980–90

The British economy is in the throes of probably the deepest recession since the last war and possibly the deepest so far this century. The recession has been generated, at least in part, by deliberate Government policy, as a supposedly temporary by-product of monetarism. This article sets out to measure the lost output and employment which would be incurred by continuing to pursue present policies over the next decade. It does so by comparing the likely outcome for the economy under monetarism, as it has been adopted by the Conservative government, with that under Keynesian policies of demand management aimed at achieving full employment through fiscal expansion. The consequences of monetarism have been estimated using the Cambridge multi sectoral dynamic model f of the British economy. This is a structural model which does not impose the assumption of long-run full employment on the results. Indeed it has the property that the automatic forces tending to return the economy to full employment after a disturbance are very weak since it assumes that money wages are inflexible downwards. This is in contrast with monetarist or neo-classical models which usually assume full employment in the long-run (and in some extreme models in the short-run as well). The purpose of present policies is of course to reduce the rate of inflation. The mone tarist view is that inflation is purely a monetary phenomenon and originates in govern ment failure to control the money supply. In this view, it is enough to gain this control and the problem is solved. In contrast, the theoretical position adopted here is that inflation is the result of an administrative process in which industries pass on costs to prices. Cost inflation in turn is attributable to import costs, which are affected by the exchange rate, and wage costs

Swiss inflation and the two versions of the monetary approaches to the balance of payments

The framework for this study is provided by the monetary approach to the balance of payments (MABP) whose major precepts are discussed in Section 1. The Swiss case provides an excellent counterexample to the conclusions which may arise from the MABP and the closely related global monetarist view of world inflation. Therefore, the initial thrust of the paper is to distinguish between a strong version and a weak version of the MABP from the basic assumptions of the monetary approach.1 While the MABP is not a theory of inflation, the two versions of the MABP suggest different trans-mission mechanisms by which world inflation can be transmitted to a small, open country like Switzerland. Empirical results are reported in Section 2 which suggest that excessive monetary growth resulting from balance-of-payments surpluses and a direct price effect were the principle causes of Swiss inflation. Therefore, the strong version of the MABP and the closely related global monetarist approach are incorrect in concluding that international inflation is transmitted by a direct price effect. The question of the appropriate exchange-rate policy for Switzerland and other concluding remarks follow in Section 3.

The speed of adjustment of the actual to the desired money stock: A comparative study

This article examines whether there are significant differences in the speed of adjustment of the actual to the desired money stock among major industrialized countries. Demand for money functions, including a partial adjustment hypothesis, were estimated for the United States, United Kingdom, Canada, Germany, France and Japan essentially over the period 1960–1976. The functions were tested for stability and found to be stable in most cases. The estimations show that, mainly with the exception of Germany and the United Kingdom for broad money, the speed of adjustment is relatively high. These results tend to support monetarist views. The statistical test for differences in the speed of adjustment revealed that only a few significant differences exist when narrow money is used. When broad money is used, howeever, the United Kingdom and Germany are shown to have significantly slower speeds of adjustment than almost all the other countries.

The money supply, wages and inflation

Since the 1950s, Milton Friedman and other monetarist economists have sought to resurrect the old view that inflation is caused by an excessive rate of expansion of the supply of money, and to apply this doctrine to the contemporary problems of western industrialised countries. This paper examines the logical development of the monetarist analysis of inflation into its present form, which relies on a model of wage determination that has come to be known as the 'expectations-augmented Phillips curve'. The theory of wage inflation propounded by the monetarists has very important implications for economic policy,! irrespective of whether their formulation of the supply and demand for money is valid or not. But it is not well supported by institutional and empirical evidence. More realistic theories of wage determination are inconsistent with the monetarist view that inflation can readily be controlled by restricting growth of the money supply.

Monetary Policy and the Stock Market: Is There a Direct Link?

Recent years have witnessed the birth of a revolutionary idea: Monetary policy and the money supply can affect the stock market directly-without first influencing the economy or investor expectations. The previous explanation for the market soaring in the midst of recession or plummeting in the midst of boom was that investors were correctly forecasting the coming trough or peak in business activity and attempting to anticipate by changing their portfolios. This was never a very satisfactory model because it did not fit the behavior of real investors. A new explanation suggests that changes in the money supply, caused by the Federal Reserve's expanding the supply in recessions and restricting it in booms, can create excessive or deficient liquidity among investors. Such excesses or deficiencies, according to this theory, cause investors to increase or decrease holdings of stocks irrespective of the investment outlook. At first glance, the new explanation has great appeal. It explains why investors act in the stock market before turns in the business cycle, without imputing to them superior forecasting ability. And it is wrapped in the mantle of monetary economics, which is currently enjoying a vogue among economic theorists. When one looks deeper, however, he may find it hard to specify exactly what the links are by which monetary policy directly influences the stock market. At this point he can either accept the explanation on a black box basis or ignore it. A better alternative is to seek an understanding of these missing links. Beryl Sprinkel's pioneering work, Money and Markets: A Monetarist View, offers one theory:

Monetary Policy and Inflation: A Simulation Study with a Keynesian Model and a Monetarist Model

In recent years the United States has experienced a period of sustained high rates of inflation which has engendered new concern among monetary economists about the character of the impact of monetary policy on inflation. In general, Keynesian oriented economists view the length of the lag from a change in monetary policy to inflation to be long and therefore, seldom emphasize the short run use of monetary policy to counteract inflation. However, some proponents of monetarism, particularly those associated with the development of the St. Louis model, have suggested that the lag from money to prices is fairly short and that much of the economic impact of monetary policy is transmitted quickly. In this paper quantitative evidence about the character of the lag from changes in monetary policy to inflation is obtained by means of simulation experiments with two quarterly econometric models of the United States economy. One is the Federal Reserve-MIT-Penn (FMP) model which is a large scale, simultaneous system of structural equations embodying Keynesian theory. The other is the St. Louis model which is a reduced form, recursive system of five behavioral equations based upon a monetarist view of the economy.

Friedman versus Tobin: A Comment

Previous articleNext article No AccessCommunicationsFriedman versus Tobin: A CommentT. Norman Van Cott and Gary SantoniT. Norman Van Cott Search for more articles by this author and Gary Santoni Search for more articles by this author PDFPDF PLUS Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by Journal of Political Economy Volume 82, Number 4Jul. - Aug., 1974 Article DOIhttps://doi.org/10.1086/260242 Views: 2Total views on this site Copyright 1974 The University of ChicagoPDF download Crossref reports no articles citing this article.

Money and Markets: A Monetarist View.

Money and Markets: A Monetarist View.

Book Reviews

Book Review in this Articles:The Textile and Clothing Industries of the United Kingdom. By Lynden BriscoeBritain's Economic Prospects Reconsidered. Edited by Sir Alec CairncrossCapital Transfers and Economic Policy : Canada, 1951–1962. (Harvard Economic Studies 135). By Richard E. Caves and Grant L. Reuber and othersMonetary Theory and Monetary Policy in the 1970's. Edited by G. Clayton, J. C. Gilbert and R. SedgwickThe Collected Writings of John Maynard KeynesInvestment : The Study of an Economic Aggregate (Mathematical Economics Texts No. 7). By Philip J. LundPublic Expenditure Economics, an introductory application of welfare economics. By Robert MillwardCost‐Benefit Analysis. By E. J. MishanEconomic Theory and the Underdeveloped Countries. By H. MyintIndustrialization without National Patents. By Eric SchiffThe Dilemma of Accountability in Modern Government: Independence versus Control. Edited by B. L. R. Smith and D. C. HagueInternational Economics. By Bo SöderstenxsMoney and Markets : A Monetarist View. By Beryl Wayne Sprinkel

A Monetarist View of Demand Management: The United States Experience

A Monetarist View of Demand Management: The United States Experience