Monetarist School of Economic Thought

Background

NAIRU: Non Accelerating NRT: Natural Rate

• They extended the classical model to some extent
• Milton Friedman
  • created NAIRU and NRT
  • Permanent income hypothesis
• $M^S$, money supply is the most important aspect
• Changes in the money supply → Change in the growth of income
• Monetary policy $$\Delta M^S\uparrow ⟹\Delta y\uparrow$$

Drawback accepted by Friedman

This effect is applicable only in the short run. E.g. if you want to increase employment opportunity

In the long run, monetary policy only affects the price level

$$\Delta M^S⟹\Delta P$$

i.e., INFLATION.

Private sector is inherently stable, the instability comes from the public sector

The Four Propositions of the Milton Framework

Background

Monetarists are those people who think it is more important to regulate the supply of money in an economy, rather than to influence other economic instruments or variables. Milton Friedman was the major intellectual force in the early development of Monetarism

1. The supply of money is the dominant influence on the national income. $Y=f(M^S)$
2. In the short run the supply of money influcences the real variables i.e., output, $Y$ and employment.
3. In the long run, the influence of money is primarily on the price level and other nominal magnitutes. In the long run, the real variables such as output and employment are determined by the real factors / supply side factors such as (a) the efficiency of capital, (b) the efficiency of labour, (c) technology, (d) RnD, (e) Innovation and so on, and not by the monetary factors
4. The private sector is inherently stable. the instability in the economy is primarily the resultant of the government policies (public sector)

Conclusion: The central policy conclusion is, the stability in the growth of money supply is crucial for a stable economy. Thus, Milton Friedman long proposed a constant money growth rate rule^[Money supply should constantly grow].