Business Cycles Explained: Monetarist Theory

Check out Prof. Cowen’s popular econ blog, Marginal Revolution.

Moving to the world of Monetarism, Tyler Cowen introduces Milton Friedman and evaluates the case for creating monetary stability.
Monetarism claims that money supply fluctuations drive the rate of inflation and deflation. Notable monetarist Milton Friedman proposed that stabilizing monetary supply would prevent excessive highs and lows that lead to inflation on one hand and economic downturn on the other.
The monetarist theory wins points for historical support; we can find plenty of evidence that deflationary pressures lead to economic downturns. Cowen takes us to the period of stagflation in the 1970s to show the monetarist theory at work. During this period, interest and inflation rates ramped up. When the Federal Reserve decreased the money supply, deflation and unemployment followed, just as the monetarists would have predicted.
But monetarism falls behind when it comes to practical ideas about how to control the growth of the money supply. How do you go about measuring money supply? Perhaps more importantly, how do you convince central banks to follow general rules limiting money-supply growth?

5 Comments

  1. Matt Wavle

    I’d love to see how a monetarist would react to bitcoin or other crypto-currencies.

  2. Spencer Long

    Monetarism is a fabrication. All inflations and defkation is managed by the U.S treasury.

  3. Stephen Dincher

    Monetarism is nonsense. All this can be explained by the ATBC. Monetary contraction ALWAYS occurs following a monetary expansion. The contraction is the correction required to fix the problems and malinvestments of the expansion. To say that the contraction is the cause of the bust is correlation. It’s akin to saying that the hangover is caused by the cessation of drinking. Absurd. The hangover begins once the drinking binge is halted, but the drinking is what causes the hangover. Likewise the recession begins with the contraction of the money supply, but the expansion of the money supply is what causes the malinvestments that need liquidating in the first place. Only ATBC looks to the root of the whole cycle and why it happens. The other theories look at small parts and say "Eureka!" Sadly, Keynes and the Chicagoans have caused irreparable damage with their economic sophistry.

  4. diamond_max

    Monetarism happened during Europe’s depression. One of the causes of America’s Great Depression. It was like dominoes.

  5. jcrescenzo

    End the FED!

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