Curiosity 8.2: What Is a NOW Account?

9
The Monetarist Rule
The purpose of this chapter is to examine the monetarist approach to macroeconomic analysis and discuss a major legacy of monetarism: the monetarist rule that the money supply should grow at a fixed rate equal to the real rate of income growth of the economy.
By the early 1960s, the Keynesian view of the macroeconomy had become the conventional wisdom, evidence of which was its explicit use as the rationale for the tax cut. Just as the Keynesian view was reaching the peak of its popularity, however, in 1963 Milton Friedman and Anna Schwarz published their book A Monetary History of the United States, 1867-1960, heralding the arrival of a competing view of the macro-economy that has since come to be known as monetarism.
Monetarists deplored the way in which disciples of Keynes neglected the role of money, something that Keynes himself had stressed, and placed money at center stage of the macroeconomy, the position it had held in the classical view (see appendix 4.1), which was the conventional wisdom before the Keynesian revolution. In the late 1960s and early 1970s, the monetarist view gained considerable popularity, primarily because during this time the money supply increased dramatically, causing monetarist predictions to be more accurate than those of the Keynesians. Monetarists claim that crowding-out forces are so strong that fiscal actions are completely ineffective, and that only money matters in determining the level of economic activity. Keynesians soon came to agree that money matters and modified their thinking to develop a more eclectic approach. Monetarists, however, insisted that only money matters. This dogmatism, at first very effective as an attention-getting debating tactic, has ultimately been a main reason for the decline of monetarism, as it became evident that several factors in addition to money play roles in the operation of the macroeconomy.

 



Macroeconomic Essentials. Understanding Economics in the News 2000
Macroeconomic Essentials - 2nd Edition: Understanding Economics in the News
ISBN: 0262611503
EAN: 2147483647
Year: 2004
Pages: 152

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