Importance of Money and Monetarism

Introduction to Monetarism

• Monetarism is a school of economic thought.
• Main assertion: The money supply is the chief determinant of:
  • Current money GDP in the short run.
  • Price level in the long run.

Monetary Policy

• Instruments used:
  • Interest rates to adjust the money supply.
• Objective: Target growth rate of the money supply.

Historical Context

• Gained prominence in the 1970s.
• Significant in reducing inflation in the U.S. and U.K.
• Influenced U.S. central bank's actions during the 2007-2009 global recession.

Milton Friedman and the Great Depression

• Primarily associated with Milton Friedman, a Nobel Prize-winning economist.
• Argued that poor monetary policy by the Federal Reserve caused the Great Depression in the 1930s.
• Critique of the Fed's actions:
  • Failed to offset downward pressures on the money supply.
  • Reduced the stock of money, contrary to what should have been done.

Market Behavior

• Markets naturally move towards stability.
• Incorrectly set money supply leads to erratic market behavior.

Criticism and Conclusion

• Keynesian school criticized the monetarist perspective.
• Key takeaway:
  • Inflation cannot continue indefinitely without an increase in the money supply.
  • Controlling the money supply is the central bank's primary responsibility.