Milton Friedman's Monetarist Theory

Economic theories explore the relationships linking changes in the money supply to changes in economic activity and prices. With a mixture of theoretical ideas, philosophical beliefs, and policy prescriptions, these theories can help elaborate on both historic and current financial situations. For instance, the general understanding of the monetarist theory, founded by economist Milton Friedman, focuses on macroeconomic activities that examine the impact of changes in the money supply and central banking. This economic school of thought theoretically challenges Keynesian economics (OnlineTexts) to contend that variations in the money supply are the most significant determinants of the rate of economic growth, the behavior of the business cycle, the national output in the short run, and the price level over longer periods of time (Investopedia). Through the developments from other theories, more laissez-faire government approaches, and the use of the quantity theory of money, monetarism has dramatically impacted and helped explain changes in monetary policy and the banking system for nearly one hundred years. To fully grasp this economic theory, the history behind it and what influenced its existence must be understood. Following the Great Depression, Keynesian economics mainly dominated the United States as well as countries globally. This economic theory focused on total spending in the economy and its effects on output and inflation (Blinder). Keynesians traditionally saw fiscal policy as the key tool for economic management, believed monetary policy should simply be used as a backup, and believed that the government’s role was to maintain the economy at full employment (Biz/Ed). This theory also emphasized interest rates as a target of monetary policy, raising rates to slow down the economy and reducing rates to speed things up (Allen 283). Although these views were the main focus for some time, many economists saw that the theory was leaving most of our

Cited: Allen, Larry. "Monetarism." The Encyclopedia of Money. Santa Barbara, Calif.: ABC-CLIO, 2009. 283-85. Print. Biz/Ed. Monetary Policy - Inflation - Cures. 2010. 7 May 2010 . Blinder, Alan S. Keynesian Economics. 2008. 7 May 2010 . Friedman, Milton. "The Role of Monetary Policy." American Economic Review 58.1 (March, 1968): 1-17. JSTOR. Web. 7 May 2010. . Greenspan, Alan. The Age of Turbulence: Adventures in a New World. New York: Penguin, 2007. 85. Print. Investopedia. Monetarist Theory. 2010. 7 May 2010 . McCallum, Bennett T. Monetarism. 2008. 7 May 2010 . Monetarism. 2010. 7 May 2010 . OnlineTexts. Monetarism. 2005. 7 May 2010 . Overtveldt, Johan Van. Bernanke 's Test: Ben Bernanke, Alan Greenspan, and the Drama of the Central Banker. Chicago: Agate, 2009. 41-45. Print. Pettinger, T