A Macroeconomics Reader

By Brian Snowdon; Howard R. Vane | Go to book overview

Introduction

‘Monetarism’, a term first introduced by Karl Brunner (1968), refers to a school of economic thought which initially evolved in the United States to attack the orthodox Keynesian analysis and associated policy-activism of the 1950s and 1960s. The historical development of the orthodox monetarist school can be traced in three main stages (see Snowdon et al. 1994). The first main stage, from the mid-1950s to the mid-1960s, involved an attempt, by Professor Milton Friedman and his associates, to re-establish the quantity theory of money approach to macroeconomic analysis. In this approach changes in the money supply are regarded as the predominant, though not the only, factor explaining changes in money income. Friedman’s (1956) seminal article on ‘The Quantity Theory of Money: A Restatement’ in which he asserted that the demand for money (and by implication velocity) is a stable function of a limited number of variables lies at the heart of the modern quantity theory approach. However, it was the breadth and depth of empirical evidence cited in Friedman and Schwartz’s (1963) book on A Monetary History of the United States, 1867-1960 which was particularly influential in reviving interest in the potency of money in generating cyclical fluctuations. Their analysis of the US historical record provided strong support for the view that independent movements of the stock of money played a significant role in causing macroeconomic instability. According to Lucas (1994) this book played ‘an important—perhaps even decisive—role in the 1960s’ debates over stabilization policy between Keynesians and monetarists’.

The second main stage in the development of orthodox monetarism involved the expectations-augmented Phillips curve analysis which was absorbed into monetarist analysis after the mid-to-late 1960s. Central to this phase is Friedman’s 1967 Presidential Address to the American Economic Association, subsequently published in 1968 in the American Economic Review as ‘The Role of Monetary Policy’. In this article (reprinted on pp. 164-79) Friedman denies the existence of a permanent/long-run trade-off between inflation and unemployment and introduces the natural rate of unemployment hypothesis. The essence of this hypothesis is a reaffirmation of the classical view that in the long run nominal magnitudes cannot determine real magnitudes such as employment and output. According to

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