Monetarism

Definition

Monetarism is a macroeconomic theory that suggests that by targeting the growth rate of the money supply, governments can promote economic stability. Essentially, it is a set of views based on the belief that the primary determinant of economic growth is the total amount of money in the economy.

Origin

The origins of monetarism can be traced back to the mid-20th century, primarily developed by economist Milton Friedman and his colleagues. Friedman introduced the theory of monetarism in the 1960s, opposing Keynesian fiscal policy and emphasizing the importance of monetary policy in economic regulation.

Categories and Features

Monetarism is mainly divided into two categories: rule-based monetarism and discretionary monetarism. Rule-based monetarism advocates that central banks should follow a fixed rule for money supply growth, while discretionary monetarism allows central banks to adjust monetary policy flexibly according to economic conditions. Features of monetarism include emphasizing stable growth of the money supply, opposing excessive government intervention, and focusing on inflation control.

Case Studies

A typical case is the U.S. monetary policy in the 1980s. Under the leadership of Paul Volcker, the Federal Reserve adopted strict monetarist policies to curb high inflation by controlling the money supply. Another case is the UK during 1979 to 1983, where the Thatcher government implemented monetarist policies to reduce inflation by controlling the money supply.

Common Issues

Investors applying monetarism may encounter issues such as the difficulty of precisely controlling the money supply and the lag effect of monetary policy potentially causing economic fluctuations. Additionally, monetarism may overlook the impact of other economic factors on economic growth.