Concluding Remarks
Monetary orthodoxy is anti-Keynesian in its preference for rules over discretion. It shares the classical school’s sympathy for credible commitments to well established, openly communicated, and non-contingent rules.
Monetarism advocates monetary policy by law, not by genius. Yet, whereas classical monetary orthodoxy proposes the commitment to “external stability”, monetarism favours “internal stability In this, it is Keynesian. Monetarist money-supply rules are best understood as an attempt to combine the best of two worlds: the rationality of the Gold Standard with the advantages of flexible exchange rates.One of the reasons why monetarism became so popular, until governments actually tried (some of) it out, was its simplicity. Like progressive policy circles, which upheld simplistic versions of Keynes’s General Theory, conservative policy circles felt comfortable with the monetarist hyperbole that markets never fail, while governments always do. Even prime ministers and presidents could grasp the gist of Friedman’s one-equation macroeconomics. Monetarism, however, did not stand the test of time. The money demand function was found to be unstable. Accordingly, money supply targeting proved to increase interest rate volatility and, therefore, to destabilize the real economy. David Laidler, himself a leading monetarist, closed the book on monetarism in 1989: “The simple fact remains that a further 30 years of monetarist analysis has not been able to demonstrate the empirical existence of a structurally stable transmission mechanism between money and inflation to the satisfaction of its own practitioners, let alone its critics” (Laidler 1989: 1157; see also Laidler 1993).
This is not to say that monetarism was without any merit. Friedman’s permanentincome hypothesis and the expectations-augmented Phillips curve remain the most influential monetarist contributions.
The lasting impact of monetarism is evident in undergraduate textbooks. Further, monetarism is to be responsible for an intellectual climate that made possible the Volcker disinflation and the subsequent great moderation. In 2002, as a freshly appointed member of the Federal Reserve Board of Governors, Ben Bernanke canonized Friedman’s and Schwartz’s Monetary History: “I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again” (Bernanke 2002). A few years later, not long after he was promoted to become chairman, Bernanke found himself and the Federal Reserve caught in a liquidity trap, and witnessed the return of the “fiscal stimulus”. Even unconventional policy measures that have more than tripled the Federal Reserve’s balance sheet could not prevent a collapse of output and inflation.Arash Molavi Vassei
See also:
Bullionist and anti-bullionist schools (II); Banking and currency schools (II); Chicago School (II); Milton Friedman (I); David Hume (I); Macroeconomics (III); Money and banking (III); New classical macroeconomics (II).