monetary theory. Essence of monetarism The ideas of the monetary school underlie

Monetarism is a school of economic thought that advocates the role of government control over the amount of money in circulation. Representatives of this direction believe that it affects the volume of production in the short term and the price level in a longer period. The policy of monetarism is focused on targeting the growth rate of the money supply. Long-term planning is valued here, rather than decision-making depending on the situation. The key representative of the direction is Milton Friedman. In his main work, The Monetary History of the United States, he argued that inflation was primarily associated with an unreasonable increase in the money supply in circulation and advocated its regulation by the country's central bank.

Key features

Monetarism is a theory that focuses on the macroeconomic effects of the money supply and the activities of central banks. It was formulated by Milton Friedman. In his opinion, an excessive increase in the money supply in circulation irreversibly leads to inflation. The task of the central bank is solely to maintain price stability. The school of monetarism originates from two historically antagonistic currents: the tight monetary policy that was prevalent in the late 19th century, and the theories of John Maynard Keynes that gained ground in the interwar period after an unsuccessful attempt to restore the gold standard. Friedman, on the other hand, focused his research on price stability, which depends on the existence of an equilibrium between the supply and demand of money. He summarized his findings in a joint work with Anna Schwartz, "The Monetary History of the United States in 1867-1960."

Description of the theory

Monetarism is a theory that views inflation as a direct consequence of an excessive supply of money. This means that the responsibility for it lies entirely with the central bank. Friedman originally proposed a fixed monetary rule. According to him, the money supply should increase automatically by k% annually. Thus, the central bank will lose its freedom of action, and the economy will become more predictable. Monetarism, whose representatives believed that reckless manipulation of the money supply could not stabilize the economy, is primarily long-term planning that prevents the emergence of emergencies, and not attempts to quickly respond to them.

Denying the need for a gold standard

Monetarism is a direction that gained popularity after the Second World War. Most of its representatives, including Friedman, see the gold standard as an impractical vestige of the old system. Its undoubted advantage is the existence of internal restrictions on the growth of money. However, an increase in population or an increase in trade leads irreversibly in this case to deflation and a drop in liquidity, since in this case everything depends on the extraction of gold and silver.

Formation

Clark Warburton is credited with the first monetary interpretation of fluctuations in business activity. He described it in a series of articles in 1945. This is how the modern trends of monetarism were born. However, the theory became widespread after the introduction of the quantity theory of money by Milton Friedman in 1965. It existed long before him, but the then dominant Keynesianism called it into question. Friedman believed that the expansion of the money supply would lead not only to an increase in savings (when supply and demand were in equilibrium, people had already made the necessary savings), but also to an increase in aggregate consumption. And this is a positive fact for national production. The increase in interest in monetarism is also due to the failure of Keynesian economics to overcome unemployment and inflation after the collapse of the Bretton Woods system in 1972 and the oil crises of 1973. These two negative phenomena are directly interconnected, the solution of one of the problems leads to the exacerbation of the other.

In 1979, US President Jimmy Carter appointed Paul Volcker as head of the Federal Reserve. He limited the money supply in accordance with Friedman's rule. The result was price stability. Meanwhile, in the UK, the election was won by the representative of the Conservative Party, Margaret Thatcher. Inflation during that period rarely fell below 10%. Thatcher decided to use monetarist measures. As a result, by 1983 the inflation rate had fallen to 4.6%.

Monetarism: representatives

Among the apologists of this trend are such prominent scientists:

• Carl Brunner.
• Phillip D. Kagan.
• Milton Friedman.
• Alan Greenspan.
• David Leidler.
• Allan Meltzer.
• Anna Schwartz.
• Margaret Thatcher.
• Paul Walker.
• Clark Warburton.

Nobel laureate M. Friedman

We can say that the theory of monetarism, no matter how strange it may sound, began with Keynesianism. Milton Friedman, early in his academic career, was an advocate of fiscal regulation of the economy. However, later he came to the conclusion that it was wrong to interfere in the national economy by changing government spending. In his famous works, he argued that "inflation is always and everywhere a monetary phenomenon." He opposed the existence of the Federal Reserve, but believed that the task of the central bank of any state is to maintain the demand and supply of money in balance.

"Monetary History of the United States"

This famous work, which was the first large-scale study using the methodological principles of the new direction, was written by Nobel laureate Milton Friedman in collaboration with Anna Schwartz. In it, scientists analyzed the statistics and came to the conclusion that the money supply significantly affected the US economy, especially the passage of business cycles. This is one of the most outstanding books of the last century. The idea of ​​writing it was proposed by the chairman of the Federal Reserve, Arthur Burns. The Monetary History of the United States was first published in 1963.

Origins of the Great Depression

The Monetary History of the United States was written by Friedman and Schwartz under the auspices of the National Bureau of Economic Research from 1940. She came out in 1963. A chapter on the Great Depression appeared two years later. In it, the authors criticize the Federal Reserve for inaction. In their opinion, he should have maintained a stable money supply and made loans to commercial banks, and not brought them to mass bankruptcy. Monetary History uses three main indicators:

• The coefficient of cash on the accounts of individuals (if people believe in the system, then they leave more on the cards).
• The ratio of deposits to bank reserves (under stable conditions, financial and credit institutions borrow more).
• "Increased efficiency" money (what serves as cash or highly liquid reserves).

Based on these three indicators, the money supply can be calculated. The book also discusses the problems of using the gold and silver standard. The authors measure the velocity of money and try to find the best way for central banks to intervene in the economy.

Contribution to science

Thus, monetarism in economics is the direction that first presented the rationale for the Great Depression. Economists used to see its origins in the loss of consumer and investor confidence in the system. The monetarists responded to the challenges of the new time by proposing a new way to stabilize the national economy when Keynesianism no longer worked. Today, in many countries, a modified approach is used, which involves more state intervention in the economy to regulate the speed of circulation of money and their quantity in circulation.

Criticism of Friedman's findings

According to Alan Blinder and Robert Solow, fiscal policy only becomes ineffective when the elasticity of demand for money is zero. However, in practice this situation does not occur. Friedman attributed the Great Depression to the inaction of the US Federal Reserve Bank. However, some economists, such as Peter Temin, do not agree with this conclusion. He believes that the origins of the Great Depression are exogenous, not endogenous. In one of his works, Paul Krugman argues that the financial crisis of 2008 showed that the state is not able to control "broad" money. In his opinion, their supply is almost unrelated to GDP. James Tobin notes the importance of the findings of Friedman and Schwartz, but questions their proposed measures of the velocity of money and their impact on business cycles. Barry Eichengreen argues that the Federal Reserve could not be active during the Great Depression. In his opinion, the increase in the money supply was hindered by the gold standard. It calls into question the rest of the conclusions of Friedman and Schwartz.

On practice

Monetarism in the economy emerged as a direction that was supposed to help cope with the problems after the collapse of the Bretton Woods system. A realistic theory should explain the deflationary waves of the late 19th century, the Great Depression, the post-Jamaica stagflation. According to monetarists, the velocity of money circulation directly affects fluctuations in business activity. Thus, the cause of the Great Depression is the insufficiency of the money supply, which led to a drop in liquidity. Any major fluctuations and volatility in prices are due to the wrong policy of the central bank. An increase in the money supply in circulation is usually associated with the need to finance government spending, so they need to be reduced. Macroeconomic theory before the 1970s, by contrast, insisted on expanding them. The recommendations of the monetarists have proven their effectiveness in practice in the US and the UK.

Modern monetarism

Today, the Federal Reserve System uses a modified approach. It involves more extensive state intervention in case of temporary instability in market dynamics. In particular, it should regulate the velocity of circulation of money. European colleagues prefer more traditional monetarism. However, some researchers believe that this policy was the reason for the weakening of currencies in the late 1990s. Since that time, the conclusions of monetarism begin to be called into question. The debate about the role of this school of economic thought in trade liberalization, international investment, and effective central bank policy continues to this day.

However, monetarism remains an important theory on which new ones are built. His conclusions are still relevant and deserve detailed study. Friedman's work is widely known in the scientific community.

Forerunners of monetarism

Main article: Quantity Theory of Money

J. Mill

The understanding that price changes depend on the amount of money supply has come into economic theory since ancient times. So, in the III century BC. e. the well-known ancient Roman jurist Julius Paulus claimed this. Later, in 1752, the English philosopher D. Hume, in his Essay on Money, studied the relationship between the amount of money and inflation. Hume argued that an increase in the money supply leads to a gradual increase in prices until they reach their original proportion with the amount of money in the market. These views were shared by the majority of representatives of the classical school of political economy. By the time Mill wrote his Principles of Political Economy, a general quantity theory of money had already taken shape. To Hume's definition, Mill added a clarification about the need for a constancy of the structure of demand, since he understood that the supply of money can change relative prices. At the same time, he argued that an increase in the money supply does not automatically lead to an increase in prices, because money reserves or commodity supply can also increase in comparable volumes.

Within the framework of the neoclassical school, I. Fischer in 1911 gave a formal form to the quantitative theory of money in his famous equation of exchange:

,

The modification of this theory by the Cambridge school (A. Marshall, A. Pigou) formally looks like this:

,

Fundamentally, these approaches differ in that Fisher attaches great importance to technological factors, and representatives of the Cambridge School - to the choice of consumers. At the same time, Fisher, unlike Marshall and Pigou, excludes the possibility of the influence of the interest rate on the demand for money.

Despite its scientific acceptance, the quantity theory of money has not gone beyond academia. This was due to the fact that before Keynes, a full-fledged macroeconomic theory did not yet exist, and the theory of money could not be applied in practice. And after its appearance, Keynesianism immediately took a dominant position in the macroeconomics of that time. During these years, only a small number of economists developed the quantity theory of money, but, despite this, interesting results were obtained. So, K. Warburton in 1945-53. found that an increase in the money supply leads to an increase in prices, and short-term fluctuations in GDP are associated with the money supply. His work anticipated the advent of monetarism, however, the scientific community did not pay much attention to them.

The formation of monetarism

In 1963, Friedman's famous work, written in collaboration with D. Meiselman, "The Relative Stability of the Velocity of Money and the Investment Multiplier in the United States for 1897-1958", was published, which caused a heated debate between monetarists and Keynesians. The authors of the article criticized the stability of the spending multiplier in Keynesian models. In their opinion, nominal money incomes depended solely on fluctuations in the money supply. Immediately after the publication of the article, their point of view was subjected to harsh criticism from many economists. At the same time, the main complaint was the weakness of the mathematical apparatus used in this work. So, A. Blinder and R. Solow later admitted that such an approach is "too primitive for the presentation of any economic theory."

In 1968, Friedman's article "The Role of Monetary Policy" was published, which had a significant impact on the subsequent development of economic science. In 1995, J. Tobin called this work "the most significant ever published in an economics journal." This article started a new branch of economic research, rational expectations theory. Under its influence, the Keynesians had to reconsider their views on the rationale for active politics.

Key provisions

Demand for money and supply of money

By assuming that the demand for money is similar to the demand for other assets, Friedman first applied the theory of demand for financial assets to money. Thus, he obtained the money demand function:

,

According to monetarism, the demand for money depends on the dynamics of GDP, and the money demand function is stable. At the same time, the money supply is unstable, as it depends on the unpredictable actions of the government. Monetarists argue that in the long run, real GDP will stop growing, so a change in the money supply will not have any effect on it, affecting only the inflation rate. This principle became the basis for monetarist economic policy and was called money neutrality .

monetary rule

In connection with the operation of the principle of money neutrality, monetarists advocated legislative consolidation monetarist rule that the money supply should expand at the same rate as the growth rate of real GDP. Compliance with this rule will eliminate the unpredictable impact of counter-cyclical monetary policy. According to monetarists, an ever-increasing money supply will support expanding demand without causing an increase in inflation.

Despite the logic of this statement, it immediately became the object of sharp criticism from the Keynesians. They argued that it was foolish to abandon an active monetary policy, since the velocity of money is not stable, and a constant increase in the money supply can cause serious fluctuations in aggregate spending, acting destabilizingly on the entire economy.

The monetarist concept of inflation

Natural rate of unemployment

See also the article: Natural rate of unemployment (monetarism)

An important place in the argumentation of monetarists is occupied by the concept of " natural rate of unemployment". Natural unemployment refers to voluntary unemployment, in which the labor market is in equilibrium. The level of natural unemployment depends both on institutional factors (for example, on the activity of trade unions) and on legislative ones (for example, on the minimum wage). The natural rate of unemployment is the unemployment rate that keeps real wages and prices stable (in the absence of productivity growth).

According to monetarists, deviations of unemployment from its equilibrium level can occur only in the short term. If the employment rate is above the natural level, then inflation rises, if it is lower, then inflation decreases. Thus, in the medium term, the market comes to an equilibrium state. Based on these premises, conclusions are drawn that employment policy should be aimed at smoothing fluctuations in the unemployment rate from its natural rate. At the same time, it is proposed to use monetary policy instruments to balance the labor market.

Permanent income hypothesis

In his 1957 work The Theory of the Consumption Function, Friedman explained the behavior of consumers in permanent income hypothesis. In this hypothesis, Friedman argues that people experience random changes in their income. He considered current income as the sum of permanent and temporary income:

Permanent income in this case is similar to the average income, and temporary income is equivalent to a random deviation from the average income. According to Friedman, consumption depends on permanent income, as consumers smooth out fluctuations in temporary income with savings and borrowed funds. The constant income hypothesis states that consumption is proportional to constant income and mathematically looks like this:

where is a constant value.

Monetary theory of the business cycle

The main provisions of Friedman's concept

1. The regulatory role of the state in the economy should be limited to control over money circulation;
2. The market economy is a self-regulating system. Disproportions and other negative manifestations are associated with the excessive presence of the state in the economy;
3. The money supply affects the amount of expenses of consumers, firms. An increase in the mass of money leads to an increase in production, and after full capacity utilization - to an increase in prices and inflation;
4. Inflation must be suppressed by any means, including through cuts in social programs;
5. When choosing the rate of growth of money, it is necessary to be guided by the rules of "mechanical" growth in the money supply, which would reflect two factors: the level of expected inflation; growth rate of the social product.
6. Self-regulation of the market economy. Monetarists believe that the market economy, due to internal tendencies, strives for stability and self-adjustment. If there are disproportions, violations, then this occurs primarily as a result of external interference. This provision is directed against the ideas of Keynes, whose call for government intervention leads, according to monetarists, to disrupt the normal course of economic development.
7. The number of state regulators is reduced to a minimum. The role of tax and budgetary regulation is excluded or reduced.
8. As the main regulator influencing economic life, serve as "money impulses" - regular money emission. Monetarists point to the relationship between the change in the amount of money and the cyclical development of the economy. This idea was substantiated in the book published in 1963 by American economists Milton Friedman and Anna Schwartz, A Monetary History of the United States, 1867-1960. Based on the analysis of actual data, it was concluded here that the subsequent onset of one or another phase of the business cycle depends on the growth rate of the money supply. In particular, the lack of money is the main cause of depression. Proceeding from this, monetarists believe that the state must ensure a constant money emission, the value of which will correspond to the growth rate of the social product.
9. Rejection of short-term monetary policy. Since the change in the money supply does not affect the economy immediately, but with some delay (lag), the short-term methods of economic regulation proposed by Keynes should be replaced with a long-term policy designed for a long-term, permanent impact on the economy.

So, according to the views of monetarists, money is the main sphere that determines the movement and development of production. The demand for money has a constant tendency to increase (which is determined, in particular, by the propensity to save), and in order to ensure the correspondence between the demand for money and its supply, it is necessary to pursue a course towards a gradual increase (at a certain pace) of money in circulation. State regulation should be limited to control over money circulation.

Monetarism in practice

Money targeting

The first step in the implementation of the policy of monetarism by the Central Banks was the inclusion of monetary aggregates in their econometric models. Already in 1966, the US Federal Reserve began to study the dynamics of monetary aggregates. The collapse of the Bretton Woods system contributed to the spread of the monetarist concept in the monetary sphere. The central banks of the largest countries have ceased to target the exchange rate in favor of monetary aggregates. In the 1970s, the US Federal Reserve chose the M1 aggregate as an intermediate target, and the federal funds rate as a tactical target. Following the US, Germany, France, Italy, Spain and the United Kingdom announced money growth targets. In 1979, European countries came to an agreement on the creation of the European Monetary System, under which they pledged to keep the rates of their national currencies within certain limits. This led to the fact that the largest countries in Europe were targeting both the exchange rate and the money supply. Small open economies like Belgium, Luxembourg, Ireland and Denmark continued to target only the exchange rate. Yet in 1975, most developing countries continued to maintain some form of fixed exchange rate. However, beginning in the late 1980s, monetary targeting began to give way to inflation targeting. And by the mid-2000s, most developed countries switched to the policy of setting an inflation target, rather than monetary aggregates.

Notes

1. Moiseev S. R. The rise and fall of monetarism (Russian) // Economic questions. - 2002. - No. 9. - S. 92-104.
2. M. Blaug. Economic thought in retrospect. - M .: Delo, 1996. - S. 181. - 687 p. - ISBN 5-86461-151-4
3. Sazhina M. A., Chibrikov Economic theory. - 2nd edition, revised and enlarged. - M .: Norma, 2007. - S. 516. - 672 p. - ISBN 978-5-468-00026-7
4. Mishkin F. Economic theory of money, banking and financial markets. - M .: Aspect Press, 1999. - S. 548-549. - 820 p. - ISBN 5-7567-0235-0
5. Sazhina M. A., Chibrikov Economic theory. - 2nd edition, revised and enlarged. - M .: Norma, 2007. - S. 517. - 672 p. - ISBN 978-5-468-00026-7
6. Mishkin F. Economic theory of money, banking and financial markets. - M .: Aspect Press, 1999. - S. 551. - 820 p. - ISBN 5-7567-0235-0
7. B. Snowdon, H. Vane. Modern macroeconomics and its evolution from a monetarist point of view: an interview with Professor Milton Friedman. Translation from the Journal of Economic Studies (Russian) // Ecowest. - 2002. - No. 4. - S. 520-557.
8. Mishkin F. Economic theory of money, banking and financial markets. - M .: Aspect Press, 1999. - S. 563. - 820 p. - ISBN 5-7567-0235-0
9. S. N. Ivashkovsky. Macroeconomics: Textbook. - 2nd edition, corrected, supplemented. - M .: Delo, 2002. - S. 158-159. - 472 p. - ISBN 5-7749-0178-5
10. C. R. McConnell, S. L. Brew. Economics: principles, problems and politics. - translation from the 13th English edition. - M .: INFRA-M, 1999. - S. 353. - 974 p. - ISBN 5-16-000001-1
11. Course of economic theory / Ed. Chepurina M. N., Kiseleva E. A. - Kirov: ASA, 1995. - S. 428-431. - 622 p.
12. M. Blaug. Economic thought in retrospect. - M .: Delo, 1996. - S. 631-634. - 687 p. - ISBN 5-86461-151-4
13. Sazhina M. A., Chibrikov Economic theory. - 2nd edition, revised and enlarged. - M .: Norma, 2007. - S. 483. - 672 p. -

Initially, the basis of monetarism is money theory. Representatives of this theory believe that the supply of money is autonomous, and the rash actions of the state to sell bonds and additional emission cause economic imbalance.

If we state the theory of monetarism briefly, we can single out the following theses:

• the role of the state is limited to control over the circulation of money;
• the market economy is regulated independently;
• the amount of money in circulation affects the amount of consumer spending, rising prices and inflation;
• inflationary processes must be suppressed;
• any intervention in market processes is fatal;
• the main regulator is the issue of money;
• rejection of short-term monetary policy, its replacement by the adoption of long-term measures.

From the point of view of monetarism and economic regulation in accordance with the theory, money is the main sphere that determines the order of movement and development of production processes. The demand for money is constantly growing, which requires that it be matched with the supply.

To do this, there must be a gradual increase in the money supply in circulation. At the same time, state regulation is reduced to control over the circulation of money.

It is important to note: Monetarism is the diametrical opposite

Who is the founder of monetarism

The founder of the theory of monetarism is Milton Friedman. This American economist was the head of the Chicago school of the neoclassical revival. However, the name itself was coined by Karl Brunner.

Friedman's theory of monetarism began with, despite the fact that the views of representatives of these models on government intervention are diametrically opposed. At the beginning of his career, M. Friedman advocated the regulation of the economy, but later he came to the conclusion that interference in the national economy was not permissible.

Monetarism: representatives

Among economists, such representatives of the theory of monetarism as Alan Greenspan, Philip D. Kagan, A. Schwartz, M. Thatcher and others are known.

Today monetarists use a modified approach. It is characterized by more extensive state intervention in case of market instability.

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Forerunners of monetarism

The understanding that price changes depend on the amount of money supply has come to economic theory since ancient times. So, back in the 3rd century, the well-known ancient Roman lawyer Julius Paul argued about this. Later, in 1752, the English philosopher D. Hume, in his Essay on Money, studied the relationship between the amount of money and inflation. Hume argued that an increase in the money supply leads to a gradual increase in prices until they reach their original proportion with the amount of money in the market. These views were shared by the majority of representatives of the classical school of political economy. By the time J. S. Mill was writing his "Principles of Political Economy" in general terms, a quantitative theory of money had already taken shape. To Hume's definition, Mill added a clarification about the need for a constancy of the structure of demand, since he understood that the supply of money can change relative prices. At the same time, he argued that an increase in the money supply does not automatically lead to an increase in prices, because monetary reserves or commodity supply can also increase in comparable volumes.

In the framework of the neoclassical school, I. Fischer in 1911 gave a formal form to the quantitative theory of money in his famous exchange equation:

M V = P Q (\displaystyle MV=PQ),

The modification of this theory by the Cambridge School (Fischer) formally looks like this:

M = k P Y ​​(\displaystyle M=kPY),

Fundamentally, these approaches differ in that Fisher attaches great importance to technological factors, and representatives of the Cambridge School - to the choice of consumers. At the same time, Fisher, unlike A. Marshall and A. Pigou, excludes the possibility of the influence of the interest rate on the demand for money.

Despite its scientific acceptance, the quantity theory of money has not gone beyond academia. This was due to the fact that before Keynes, a full-fledged macroeconomic theory did not yet exist, and the theory of money could not be applied in practice. And after its appearance, Keynesianism immediately took a dominant position in the macroeconomics of that time. During these years, only a small number of economists developed the quantity theory of money, but, despite this, interesting results were obtained. So, K. Warburton in 1945-53. found that an increase in the money supply leads to an increase in prices, and short-term fluctuations in GDP are associated with the money supply. His work anticipated the advent of monetarism, however, the scientific community did not pay much attention to them.

The formation of monetarism

In 1963, Friedman's famous work was published, co-authored by him with D. Meiselman "The Relative Stability of the Velocity of Money and the Investment Multiplier in the United States for 1897-1958", which caused a heated debate between monetarists and Keynesians. The authors of the article criticized the stability of the spending multiplier in Keynesian models. In their opinion, nominal money incomes depended solely on fluctuations in the money supply. Immediately after the publication of the article, their point of view was subjected to harsh criticism from many economists. At the same time, the main complaint was the weakness of the mathematical apparatus used in this work. So, A. Blinder and R. Solow later admitted that such an approach is “too primitive for the presentation of any economic theory.”

In 1968, Friedman's article "The Role of Monetary Policy" was published, which had a significant impact on the subsequent development of economic science. In 1995, J. Tobin called this work "the most significant ever published in an economics journal." This article marked the beginning of a new direction in economic research - the theory of rational expectations. Under its influence, the Keynesians had to reconsider their views on the rationale for active politics.

Key provisions

Demand for money and supply of money

By assuming that the demand for money is similar to the demand for other assets, Friedman first applied the theory of demand for financial assets to money. Thus, he obtained the money demand function:

M d = P ∗ f (R b , R e , p , h , y , u) (\displaystyle M_(d)=P*f(R_(b),R_(e),p,h,y,u )),

According to monetarism, the demand for money depends on the dynamics of GDP, and the money demand function is stable. At the same time, the money supply is unstable, as it depends on the unpredictable actions of the government. Monetarists argue that in the long run, real GDP will stop growing, so a change in the money supply will not have any effect on it, affecting only the inflation rate. This principle became the basis for monetarist economic policy and was called money neutrality .

monetary rule

In connection with the operation of the principle of money neutrality, monetarists advocated legislative consolidation monetarist rule that the money supply should expand at the same rate as the growth rate of real GDP. Compliance with this rule will eliminate the unpredictable impact of counter-cyclical monetary policy. According to monetarists, an ever-increasing money supply will support expanding demand without causing an increase in inflation.

Despite the logic of this statement, it immediately became the object of sharp criticism from the Keynesians. They argued that it was foolish to abandon an active monetary policy, since the velocity of money is not stable, and a constant increase in the money supply can cause serious fluctuations in aggregate spending, acting destabilizingly on the entire economy.

The monetarist concept of inflation

Natural rate of unemployment

Natural unemployment is understood as voluntary unemployment, in which the labor market is in equilibrium. The level of natural unemployment depends both on institutional factors (for example, on the activity of trade unions) and on legislative ones (for example, on the minimum wage). The natural rate of unemployment is the unemployment rate that keeps the real wage and price level stable (in the absence of labor productivity growth).

According to monetarists, deviations of unemployment from its equilibrium level can occur only in the short term. If the employment rate is above the natural level, then inflation rises, if it is lower, then inflation decreases. Thus, in the medium term, the market comes to an equilibrium state. Based on these premises, conclusions are drawn that employment policy should be aimed at smoothing fluctuations in the unemployment rate from its natural rate. At the same time, to balance the labor market, it is proposed to use the instruments of monetary policy: 483 .

Permanent income hypothesis

In his 1957 work The Theory of the Consumption Function, Friedman explained the behavior of consumers in permanent income hypothesis. In this hypothesis, Friedman argues that people experience random changes in their income. He considered current income as the sum of permanent and temporary income:

Y = Y P + Y T . (\displaystyle Y=Y^(P)+Y^(T).)

Permanent income in this case is similar to the average income, and temporary income is equivalent to a random deviation from the average income. According to Friedman, consumption depends on permanent income, as consumers smooth out fluctuations in temporary income with savings and borrowed funds. The constant income hypothesis states that consumption is proportional to constant income and mathematically looks like this:

C = α Y P , (\displaystyle C=(\alpha )Y^(P),)

where α (\displaystyle (\alpha ))- constant value .

Monetary theory of the business cycle

The main provisions of Friedman's concept

1. The regulatory role of the state in the economy should be limited to control over money circulation;
2. The market economy is a self-regulating system. Disproportions and other negative manifestations are associated with the excessive presence of the state in the economy;
3. The money supply affects the amount of expenses of consumers, firms. An increase in the mass of money leads to an increase in production, and after full capacity utilization - to an increase in prices and inflation;
4. Inflation must be suppressed by any means, including through cuts in social programs;
5. When choosing the rate of growth of money, it is necessary to be guided by the rules of "mechanical" growth in the money supply, which would reflect two factors: the level of expected inflation; growth rate of the social product.
6. Self-regulation of the market economy. Monetarists believe that the market economy, due to internal tendencies, strives for stability and self-adjustment. If there are disproportions, violations, then this occurs primarily as a result of external interference. This provision is directed against the ideas of Keynes, whose call for state intervention leads, according to monetarists, to a violation of the normal course of economic development.
7. The number of state regulators is reduced to a minimum. The role of tax and budgetary regulation is excluded or reduced.
8. As the main regulator influencing economic life, serve as "money impulses" - regular money emission. Monetarists point to the relationship between the change in the amount of money and the cyclical development of the economy. This idea was substantiated in the book published in 1963 by American economists Milton Friedman and Anna Schwartz, A Monetary History of the United States, 1867-1960. Based on the analysis of actual data, it was concluded here that the subsequent onset of one or another phase of the business cycle depends on the growth rate of the money supply. In particular, the lack of money is the main cause of depression. Proceeding from this, monetarists believe that the state must ensure a constant money emission, the value of which will correspond to the growth rate of the social product.
9. Rejection of short-term monetary policy. Since the change in the money supply does not affect the economy immediately, but with some delay (lag), the short-term methods of economic regulation proposed by Keynes should be replaced with a long-term policy designed for a long-term, permanent impact on the economy.

So, according to the views of monetarists, money is the main sphere that determines the movement and development of production. The demand for money has a constant tendency to increase (which is determined, in particular, by the propensity to save), and in order to ensure the correspondence between the demand for money and its supply, it is necessary to pursue a course towards a gradual increase (at a certain pace) of money in circulation. State regulation should be limited to control over money circulation.

Monetarism in practice

Money targeting

The first step in the implementation of the policy of monetarism by the Central Banks was the inclusion of monetary aggregates in their econometric models. Already in 1966, the US Federal Reserve began to study the dynamics of monetary aggregates. The collapse of the Bretton Woods system contributed to the spread of the monetarist concept in the monetary sphere. The central banks of the largest countries have reoriented from targeting the exchange rate to targeting monetary aggregates. In the 1970s, the US Federal Reserve chose the M1 aggregate as an intermediate target, and the Federal Funds interest rate as a tactical target. Following the US, Germany, France, Italy, Spain and the United Kingdom announced money growth targets. In 1979, European countries came to an agreement on the creation of the European Monetary System, under which they pledged to keep the rates of their national currencies within certain limits. This led to the fact that the largest countries in Europe were targeting both the exchange rate and the money supply. Small open economies like Belgium, Luxembourg, Ireland and Denmark continued to target only the exchange rate. Yet in 1975 most developing countries continued to maintain some form of fixed exchange rate. However, beginning in the late 1980s, monetary targeting began to give way to inflation targeting. And by the mid-2000s, most developed countries switched to the policy of setting an inflation target, rather than monetary aggregates.

see also

Notes

1. Moiseev S. R. The Rise and Fall of Monetarism (Russian) // Questions of Economics. - 2002. - No. 9. - S. 92-104.
2. M. Blaug. Economic thought in retrospect. - M.: Delo, 1996. - S. 181. - 687 p. - ISBN 5-86461-151-4.
3. Sazhina M. A., Chibrikov G. G. Economic theory. - 2nd edition, revised and enlarged. - M. : Norma, 2007. - 672 p. - ISBN 978-5-468-00026-7.
4. Mishkin F. Economic theory of money, banking and financial markets. - M.: Aspect Press, 1999. - S. 548-549. - 820 p. - ISBN 5-7567-0235-0.
5. Mishkin F. Economic theory of money, banking and financial markets. - M. : Aspect Press, 1999. - S. 551. - 820 p. - ISBN 5-7567-0235-0.
6. B. Snowdon, H. Vane. Modern macroeconomics and its evolution from monetary point of view: interview with Professor Milton Friedman. Translation from Journal of Economic Studies (Russian) // Ekovest. - 2002. - No. 4. - pp. 520-557.
7. Mishkin F. Economic theory of money, banking and financial markets. - M. : Aspect Press, 1999. - S. 563. - 820 p. - ISBN 5-7567-0235-0.
8. S. N. Ivashkovsky. Macroeconomics: Textbook. - 2nd edition, corrected, supplemented. - M.: Delo, 2002. - S. 158-159. - 472 p. - ISBN 5-7749-0178-5.
9. C. R. McConnell, S. L. Brew. Economics: principles, problems and politics. - translation from the 13th English edition. - M. : INFRA-M, 1999. - S. 353. - 974 p. - ISBN 5-16-000001-1.

topic: Theory and politics of monetarism

Introduction

Inflation is always and everywhere connected with money.

It manifests itself in

that the amount of money will increase

much faster than production.

Milton Friedman

Financial and monetary systems need to be managed. Government bodies, including the Central Bank, have to make fundamental decisions regarding the formulation of a monetary standard, the determination of the amount of money in circulation, the establishment of exchange rate rules, the management of international financial flows, and the degree of rigidity or easiness of their monetary policy. .

Today, there are different opinions about the preference of one or another method of managing the monetary sphere. Some experts believe in active policy, when the growth rate of the money supply should be slowed down when there is a threat of inflation, and vice versa. Others are rather skeptical about the ability of government officials to use monetary policy to "fine tune" the economy, inflation and unemployment. Finally, there are monetarists who believe that strong-willed monetary policy should give way to rules-based policies.

Over the past three decades, Keynesian theory has been challenged by alternative macroeconomic concepts, in particular monetarism and rational expectations theory (RET). The development of these theories was led by outstanding scientists of world renown. Thus, the Keynesian concept of non-stabilizing employment, which dominated after the Second World War in the macroeconomic views of most economists in all countries with a market industrial economy, was developed by a group of five future Nobel laureates - Paul Samuelson, Franco Modigliani, Robert Solo, James Tobin and Lawrence Kleiv .

The 1976 Nobel Prize winner in economics, Milton Friedman, who became the intellectual leader of the monetarist school, held a different view. He initiated empirical and theoretical research showing that money plays a much more important role in determining the level of economic activity and prices than Keynesian theory suggested.

But economic thought does not stand still, after some time, Robert Lukes, Thomas Sargent and Neil Wallace develop the theory of rational expectations (RTO), which is part of the so-called new classical economic theory.

The purpose of the course project is to get acquainted with the theory of monetarism.

1. Origins of monetarism

Monetarism is an economic theory, according to which the money supply in circulation plays a decisive role in the stabilization and development of a market economy. Monetarism arose in the 1950s. The monetarist approach to economic management was widely used in the USA, Great Britain, Germany and other countries during the period of overcoming stagflation in the 1970s and early 1980s, as well as in the early 1990s during the transition to a market economy in Russia.

The pinnacle of the theoretical developments of monetarism were the concepts of stabilization of the American economy and the well-known "regonomics", the implementation of which helped the United States to reduce inflation and strengthen the dollar. After Keynesianism, the concepts of the Chicago School became the second example of the effective use of economic theory in US economic practice.

The founder of monetarism is the creator of the Chicago school, Nobel Prize winner in 1976 M. Friedman.

According to the theory of monetarism, the money supply is the main factor in short-term fluctuations in nominal GDP and long-term fluctuations in prices. Of course, Keynesians also recognize the key role of money in determining the magnitude of aggregate demand.

The main difference between the views of monetarists and Keynesians is that their approaches to determining aggregate demand are fundamentally different. Thus, representatives of the Keynesian school believe that a change in aggregate demand is influenced by many factors, while monetarists argue that the main factor influencing changes in output and prices is a change in the money supply.

1.1 Milton Friedman

Milton Friedman (born in 1912) is an American economist, winner of the 1976 Nobel Prize in Economics, awarded "for research in the field of consumption, the history and theory of money." A native of New York, he graduated from Rutgers (1932) and Chicago (1934) universities. Until 1935, he was a research assistant at the University of Chicago, then became an employee of the National Resource Committee, and since 1937, an employee of the National Bureau of Economic Research. In 1940 he taught at the University of Wisconsin, in 1941-1943. - an employee of the Ministry of Finance as part of a group of researchers in the field of taxes. From 1943 to 1946, he served as Deputy Director of the Military Statistical Research Group at Columbia University, where he received (1946) a doctorate.

In 1946 he returned to the University of Chicago as a professor of economics, remaining in this position to this day. And world fame was brought to him, first of all, by works on monetarist topics. Among them are a collection of articles published under his editorship "Studies in the Quantity Theory of Money" (1956) and a book published in collaboration with Anna Schwartz "The History of the US Monetary System, 1867-1960" (1963). Friedman's monetary concept, in the words of the American economist G. Ellis, led to the "re-discovery of money" due to inflation growing almost everywhere, especially in the recent period.

The name of M. Friedman, the Nobel laureate in modern economic theory, is usually associated with the leader of the "Chicago monetary school" and the main opponent of the Keynesian concept of state regulation of the economy. This became especially noticeable in those years (1966-1984), when he had a chance to write a weekly column in Newsweek magazine, which became, as it were, a propaganda mouthpiece for his monetarist theory.

Meanwhile, M. Fridman is multifaceted in his work and, what is very important, his scientific interests also cover the field of methodology of economic science. Indeed, for many years now, in their discussions on this problem, economists have not done without an analysis of Friedman's essay "The Methodology of Positive Economics" (1953). As well as without essays on a similar topic written by L. Robbins (1932), R. Heilbroner (1991) and M. Alle (1990), or the famous lecture delivered by P. Samuelson at the ceremony of awarding him the Nobel Prize in Economics (1970 ), and etc.

However, it is from M. Friedman's positivist methodological essay that one can draw extraordinary judgments that economic theory as a set of meaningful hypotheses is accepted when it can "explain" the actual data, only from which it follows whether it is "correct" or "erroneous" and whether it will be "accepted" or "rejected"; that, in turn, facts can never "prove a hypothesis," since they can only establish its fallacy. At the same time, his solidarity with those scientists who consider it unacceptable to present economic theory as describing, not predictive, is obvious, turning it into just mathematics in disguise. According to M. Friedman, to assert the diversity and complexity of economic phenomena means to deny the transient nature of knowledge, which contains the meaning of scientific activity, and therefore "any theory necessarily has a transient character and is subject to change with the progress of knowledge." At the same time, the process of discovering something new in familiar material, the Nobel laureate concludes, should be discussed in psychological, not logical categories, and, studying autobiographies and biographies, stimulate it with the help of aphorisms and examples.

1.2 Velocity of money

The position of the monetarists on the issue of the velocity of circulation of money is interesting. The variability of this indicator played an important role in the fall of the authority of the quantitative theory in the 30s. Modern monetarists recognize the possibility of sharp fluctuations in the rate, for example, during periods of acute inflation.

Sometimes money circulates very slowly. They are kept for a long time in a bank at home or in a bank account, using only to pay for some purchase. If a period of inflation sets in, they try to spend the money as quickly as possible, and they begin to change hands at a breakneck pace. The concept of "velocity of money" was proposed at the beginning of the last century by Alfred Marshall of the University of Cambridge and Irving Fisher of Yale University. Using this concept, one can measure the rate at which money moves from one owner to another or circulates in an economy. If the amount of money is large compared to the amount of expenditure, then the velocity of circulation will be low; if the money turns around quickly, then the speed of their circulation will be high.

Thus, we define the velocity of money as the ratio of nominal GDP to the money supply. Velocity of circulation shows the rate at which the money supply circulates relative to total income or output. Formally, it looks like this:

V ≡ GDP/M ≡ (p1q1 + p2q2...)/M ≡ PQ/M,

where P is the average price level; and Q is real GDP. The velocity of money (V) is defined as annual nominal GDP divided by the amount of money.

Velocity of money can be thought of as the rate at which money moves from one owner to another. Let's look at this with a specific example. Suppose a country produces only bread and its GDP consists of 48 million loaves of bread, each of which is sold at a price of $1, then GDP = PQ = $48 million per year (i.e. if the volume of money mass is 4 million dollars, then, according to the definition, V = 48 million dollars / 4 million dollars = 12 times a year). This means that the money turns over once a month, while the population spends its income on buying a month's supply of bread.

It should be noted that over the past one hundred and fifty years, the velocity of circulation of the monetary aggregate M2 has remained remarkably stable. At the same time, the velocity of circulation of M1 has increased significantly in recent years. The issue of stability and predictability of the velocity of money plays an important role in the development of macroeconomic policy.

1.3 Quantity price theory

Now let's look at how some economists who have dealt with this problem before used the "velocity of money" to explain the dynamics of the general price level. The underlying assumption was that the velocity of money is relatively stable and predictable. According to monetarists, the reason for this stability is that the velocity of money reflects the distribution of income and expenditure over a certain period of time. If people receive their income once a month and spend it evenly during that month, then the velocity of circulation will be 12 times a year. Even if the income of the population doubles, the price level rises by 20%, and the GDP increases several times, this will not affect the time distribution of spending in any way, the velocity of money will remain unchanged. The velocity of money will change only when individuals or businesses change their spending patterns or the way they pay their bills.

This view of the state of affairs has led classical economists, as well as some scientists, to use the concept of "velocity of circulation" to explain fluctuations in the price level. In accordance with this approach, known as the quantity theory of money and prices, we obtain the equation for the velocity of circulation

P \u003d MV / Q- (V / Q) M \u003d kM.

This equation follows from the velocity of money equation already discussed by substituting a more compact k for V/Q and solving a new equation for P. Many classical economists believed that if the methods of payment for transactions made remain unchanged, then k is constant. In addition, their opinion was based on the assumption of the existence of full employment, which means that real output should increase smoothly and equal to potential GDP. Combining these assumptions, we can say that in the short run, k (= V/Q) remains almost unchanged, and in the long run it grows smoothly.

What conclusions can we draw from studying quantity theory? As can be seen from the equation, if k is constant, then the price level changes in proportion to the amount of money supply. If the money supply is stable, prices are also stable. If the money supply increases, prices will rise accordingly. This means that if the money supply increases ten or a hundred times, galloping inflation, or hyperinflation, will arise in the country. Indeed, the quantity theory of money is best illustrated by hyperinflation. From fig. 2 shows that prices in Germany in 1922-1924 rose a billion times precisely after its Central Bank launched a printing press. Before us is one of the principles of the quantitative theory (of course, not the most humane). To understand how the quantity theory of money works, it is important to recall the fact that money is fundamentally different from ordinary goods such as bread or cars. We buy bread for food and cars for personal transportation. If prices in Russia today are a thousand times higher than they were a few years ago, it is only natural that people now need a thousand times more money to buy as much goods as they did in the past. This is the essence of the quantity theory of money, the demand for money grows in proportion to the price level.

The quantity theory of money and prices states that prices change in proportion to the size of the money supply. Although this theory is only a rough approximation of reality, it helps to explain why countries where the money supply is growing slowly have moderate inflation, while countries where the money supply is growing rapidly experience galloping inflation.

2. Modern monetarism

Modern monetarist economic theory emerged after World War II. Monetarists challenged Keynesianism by emphasizing the importance of monetary policy in stabilizing the economy at the macro level. Approximately twenty years ago, a split occurred in the monetarist trend. One part of it remained true to the old tradition, while the other (younger) turned into an influential new classical school, the views of which we will analyze below.

The monetarist approach is based on the assertion that an increase in the money supply determines the size of nominal GDP in the short run and the price level in the long run. Adherents of this approach carry out their research within the framework of the quantitative theory of money and prices, taking into account the results of the analysis of trends in the change in the velocity of money. Monetarists believe that the velocity of money is stable

(or at least permanent). If this premise is correct, it is important because the quantitative equation shows that if V is constant, then changes in M ​​will cause proportional changes in PQ (or nominal GDP).

2.1 The essence of monetarism

Monetarism, however, like all other schools, has its own characteristics. Here are a few theses that occupy a central position in monetarist theory.

· Growth rates of the money supply - the main factor in the change in nominal GDP. Monetarism is one of the main theories that studies the factors that determine aggregate demand. According to this approach, nominal aggregate demand primarily depends very much on the money supply. Fiscal policy is very important in terms of only a few aspects, such as how much of the GDP will go to military spending or private consumption. And the main macroeconomic variables (total output, employment and price levels) depend mainly on the amount of money. This state of affairs in a simplified form can be formulated as follows: "Only money matters."

What is the basis of the belief of monetarists in the supremacy of money? It relies on two assumptions. First, as Friedman writes: "There is an extraordinary stability, confirmed by research, which characterizes the regularity of quantities such as the velocity of money, which will be of interest to any specialist working with data characterizing the circulation of money." Second, many monetarists routinely claim that the demand for money is completely unresponsive to changes in interest rates.

Let's see why these assumptions lead to such conclusions. According to the quantitative equation, if the velocity of revolution (V) is stable, then M will be the only factor that determines PQ, i.e. nominal GDP. Similarly, fiscal policy, according to the monetarists, is not effective, because if V is stable, then the only force that can affect PQ is M. Thus, with a constant value of V, taxes and government spending have no chance of exerting or influence the course of events.

· Prices and wage rates are relatively flexible. One of the main provisions of Keynesianism is associated with the "stagnation" of prices and wages. Despite this, monetarists believe that prices and wages have a certain inertia, and argue that the Phillips curve has a relatively steep slope even in the short run, and also insist that it is vertical in the long run. Within the framework of the AS-AD model, according to monetarists, the short-term AS curve is rather steep. The monetarist approach combines the two previous points. Because money is the main driver of nominal GDP, and prices and wages are relatively flexible as they approach potential output, money has a small and short-term impact on real output. M affects mainly R.

This means that money can have some effect on output and prices, but in the short run, in the long run, because the economy tends to stay at full employment, money can only have the greatest impact on the price level. Fiscal policy has little effect on production and prices, both in the short and long run. This is the essence of the monetarist doctrine.

· Stability of the private sector. Finally, monetarists believe that the private sector of the economy, left without state control, will not be prone to instability. On the contrary, fluctuations in nominal GDP are, as a rule, the result of government activities, in particular changes in the money supply, which depends on the policy pursued by the Central Bank.

2.2 Monetarism and Keynesianism

What is the difference between the views of monetarists and supporters of Keynesian theory? In fact, after the rapprochement that has taken place over the past three decades, there are no great differences between these schools, and the disputes between them now concern more the placement of accents than fundamental differences.

However, we can distinguish two main differences.

First, among the representatives of the two schools there is no unity regarding the forces that affect aggregate demand. Monetarists believe that aggregate demand is influenced exclusively (or mainly) by the money supply, and that this effect is stable and predictable. They also believe that fiscal policy or autonomous changes in spending, unless accompanied by changes in the quantity of money, have little effect on output and price levels.

Keynesians, on the contrary, are of the opinion that everything is much more complicated. While agreeing that money has a significant influence on aggregate demand, output, and prices, they argue that other factors are also important. In other words, Keynesians believe that money has a certain effect on output, but no more than such variables that affect the level of aggregate spending, such as fiscal policy and net exports. In addition, they point to strong evidence that V increases systematically when interest rates rise, and therefore keeping M constant is not enough to keep nominal or real GDP constant. One of the most interesting examples of convergence between the views of Keynesians and monetarists is their belief that stabilization policy can achieve its goals through more active use of monetary policy tools.

The second point of contention among monetarists and Keynesians is the behavior of aggregate supply. Keynesians insist on the inertia of prices and wages. Monetarists, on the other hand, believe that the Keynesians exaggerate the immobility of prices and wages and that the short-run AS curve has a much steeper slope than the Keynesians claim, although it may not be vertical.

Disagreement over the slope of the AS curve has led the two schools to disagree about the impact of changes in aggregate demand in the short run. Keynesians believe that a change in (nominal) demand leads in the short run to a significant change in output with a slight change in the price level. Monetarists, on the other hand, argue that a shift in the aggregate demand curve ends, as a rule, with a change in the price level, and not in output.

The essence of monetarism lies in the fact that all the attention of the representatives of this school is focused on the special role of money in determining aggregate demand. It is also important that, in their opinion, wages and prices are relatively flexible.

3. Monetarist approach. Constant growth rates of money supply

Monetarism has played a significant role in shaping economic policy in the last forty years. Monetarists often support the ideas of the free market and the policy of non-intervention of the state in the activities of enterprises at the micro level. But their most significant contribution to macroeconomic theory is associated with the proposal to follow the invariable rules of monetary circulation, and not rely on strong-willed fiscal and monetary policy.

In principle, monetarists could advise resorting to the instruments of monetary policy for the necessary regulation of the economy. But they decided to settle on the assumption that the private sector is quite stable and that it is usually the government that introduces instability into the economy. Moreover, monetarists believe that money has an impact on output only with a significant lag, the magnitude of which can vary, so the development of an effective stabilization policy is sometimes delayed for a long time.

Thus, a key element of monetarist economic philosophy is the monetary rule: an effective monetary policy should be used to maintain a constant rate of growth in the money supply under any economic conditions.

What is the basis of this approach? Monetarists believe that a fixed rate of growth in the money supply (3-5% per year) would eliminate the main source of instability in the modern economy - unpredictable changes in monetary policy. If, instead of the Fed, some computer program was used that would constantly monitor the maintenance of a fixed growth rate of M, then the problems associated with fluctuations in the money supply would disappear. With a stable velocity of money, nominal GDP would increase at a constant and unchanging rate. And if the money supply also grew at the same pace as potential GDP, then soon stable prices would become the norm of our life.

3.1 What monetary policy can do

Monetary policy cannot fix real indicators at a certain level, but it can have a serious impact on them. And one does not contradict the other at all.

It is true that money is only a mechanism, but the mechanism is highly efficient. Without it, it would not have been possible to achieve those amazing successes in the growth of production and living standards that have occurred over the past two centuries - no other wonderful machine could have so painlessly and with little labor put an end to our village life.

But what distinguishes money from other machines is that this machine is too capricious and, if broken, plunges all other mechanisms into convulsions. The Great Depression is the most dramatic but not the only example of this. Any of the inflations was a consequence of the printing of money which was resorted to during the war to cover unsatisfied demand in addition to explicit taxes.

The first and most important lesson history teaches, perhaps the most instructive, is that monetary policy can divert money from being the main source of economic distress. This sounds like a warning to avoid big mistakes, and in part it is. The Great Depression might not have happened, and if it had, it would have been much milder if the financial authorities had not made mistakes or had not had in their hands such powerful tools as the Federal Reserve had at that time at its disposal.

Even if the recommendation not to make money a source of economic turmoil turned out to be entirely negative, it would not do much harm. Unfortunately, it's not entirely negative. The monetary machine failed even when the central authorities did not have the power that is concentrated in the hands of the Fed. In the history of the United States, the 1907 episode and earlier banking panics are examples of how the money machine can break down on its own. Therefore, financial institutions face a necessary and important task: to make such improvements to it that would minimize its occasional failures and allow them to get the most out of it.

The second task of monetary policy as the foundation of a stable economy is to keep the machine, to use Mill's analogy, in a well-oiled state. The economic system will function normally when producers and consumers, employers and wage earners have full confidence that the average price level will behave in a predictable way in the future: best of all, remaining stable. Under any conceivable institutional constraints, there is only very limited mobility in prices and wages. This degree of flexibility must be maintained to allow for the relative fluctuations in prices and wages required to accommodate progressive changes in technology and tastes. Governments should not seek to achieve some absolute price level, which in itself has no economic function. In the old days, confidence in the stability of money was associated with the gold standard, and in its heyday it served this purpose quite successfully. Of course, these times cannot be returned, and there are only a few countries in the world that are ready to afford the luxury of the gold standard - there are good reasons to refuse it. Financial institutions actually resort to some kind of surrogate for the gold standard when they fix exchange rates, reacting to fluctuations in the balance of payments solely by changing the volume of the money supply, while not caring at all about the "sterilization" of surpluses and deficits and without resorting in an open or hidden form to exchange rate control currency or to the introduction of tariffs and quotas. And again, although many central banks talk about this possibility, only a few would really want to follow this course, and by no means innocuous reasons make the majority refrain from such a step. The fact is that such a policy puts the country at the mercy of not an impersonal automaton in the form of a gold standard, but financial authorities that can act both deliberately and spontaneously.

In today's world, if monetary policy is to ensure the stability of the economic foundation, its power should be used with the utmost discretion.

And the last. Monetary policy can, to a certain extent, neutralize the strongest disturbances that affect the economic system from outside. For example, if there is a natural long-term revival of the economy - this is how the apologists of secular stagnation characterized post-war development - monetary policy can, in principle, help keep the growth of the money supply at a level that cannot be provided by other instruments. Or, say, when a bloated federal budget threatens to run into unprecedented deficits, monetary policy can dampen inflationary fears by keeping money supply growth lower than would be desirable for some reason. This means a temporary increase in interest rates, which is likely to be very painful for the budget now, but will enable the government to obtain the necessary loans to finance deficits, and this, in turn, will prevent inflation from accelerating and therefore, in the long run, definitely promises and lower prices, and lower discount rates. Finally, if the end of a war requires a country to move resources into civilian production, monetary policy can facilitate this transition by recommending an increase in the growth rate of the money supply above that necessary for normal conditions, although the experience is not encouraging, since one can go too far here.

monetarism money supply price

3.2 How monetary policy should be conducted

How should monetary policy be conducted so that it actually contributes to the achievement of the set goals in cases where it can do so?

The first recommendation is that financial authorities should look to parameters that they can control, not those that are beyond their control. If, as is often the case, the authorities take the size of the discount rate or the level of current unemployment as a direct criterion, then they are likened to a spaceship aimed at a non-existent, false star. Then it doesn't matter how sensitive and smart the navigation equipment is, the ship will still go astray. The same is true with the authorities. Among the various parameters that they are able to control, the most attractive as benchmarks are the exchange rate, the price level set by this or that index, and the total amount of money - cash plus term deposits, or this amount increased by another amount of time deposits, or some then an even broader monetary aggregate.

Among the three named indicators, the price level is rightfully the most important. Other things being equal, it really represents the best alternative. The connection between the actions of the financial authorities and the level of prices, which undoubtedly always takes place, is more indirect than the connection of their policy with any monetary aggregate. In addition, the effects of monetary actions on prices appear after a longer period of time than the reaction to a change in the amount of money, and the time lag and the size of the effect in both cases depend on the circumstances. As a result, it is impossible to predict with sufficient accuracy what effect this or that step of the authorities may have on the price level and whether it will lead to any effect at all. An attempt to directly control prices through monetary policy can obviously turn it into a source of perturbation, since errors in the choice of start and stop points are possible. Perhaps with progress in our understanding of monetary phenomena this will change, but today a more detour to the goal seems to be more reliable. Therefore: the amount of the money supply is the best direct criterion of monetary policy so far available, and this conclusion is more important than the specific choice of one or another of the monetary aggregates as a guide.

The second recommendation is to avoid sudden movements in the conduct of monetary policy. In the past, financial authorities have proven their ability to move in the wrong direction. More often, however, they chose the right direction, but either were late or moved too fast, which was their main mistake. For example, in early 1966, the US Federal Reserve began to pursue the correct policy of slowing down monetary expansion, although this should have been done a year earlier. And once it started to move in the right direction, it did so too quickly, making the most dramatic jump in the rate of change in the money supply in the entire post-war period. And again, having gone too far in this direction, the Fed was supposed to reverse course at the end of 1966, and it again overshot the optimal point and not only did not return, but even exceeded the previous rate of growth of the money supply. And this episode is no exception - this happened in 1919-1920, 1937-1938, 1953-1954 and in 1959-1960.

The reason for these overlaps is obvious - the gap in time between the actions of the financial authorities and the consequences of their actions in the economy. The authorities are trying to catch these effects on the state of the economy today, and they do not appear until six, or nine, or twelve, or even fifteen months later. Therefore, they are forced to react to every jump up or down too harshly.

The rapid adaptation of society to a publicly announced and firmly pursued policy of constant growth in the money supply is the main achievement of the financial authorities, if they follow this course steadily, avoiding sharp deviations. It is important to keep in mind that periods of relatively stable money supply growth have also been periods of relatively stable economic activity, both in the United States and elsewhere. On the contrary, periods of sharp jumps in the money supply were periods of strong fluctuations in economic activity.

Strictly adhering to the adopted course, the financial authorities are doing the best they can to maintain economic stability. If this is a course towards a constant but moderate growth of the money supply, then this is a reliable guarantee of the absence of both inflation and price deflation. Other forces, of course, can affect economic processes, disturbing their smooth flow and requiring adaptation to changing conditions, but the constant growth of the money supply will provide a favorable environment for the manifestation of such enduring factors as enterprise, ingenuity, perseverance, search, frugality, which are the spring economic development. And this is the most that can be demanded from monetary policy at the present level of our knowledge. But this "greater", as is now clear to everyone and which is important in itself, is quite achievable.

3.3 Monetarist experiment

The views of the monetarists gained popularity in the late 1970s. In the US, many thought that the Keynesian stabilization policy had failed because it could not contain inflation. When inflation hit double digits in 1979, many economists and politicians came to the conclusion that the only hope for suppressing inflation was to be pinned on monetary policy.

In October 1979, the new chairman of the Fed (Federal Reserve System), Paul Volcker, announced that it was time to get rid of inflation. This event was later called a monetarist experiment. In the course of a radical restructuring of the Fed's activities, it was decided to shift the focus from the regulation of interest rates to the policy of maintaining bank reserves and the money supply on a predetermined growth path.

The leadership of the Fed hoped that by limiting the amount of money in circulation, it could achieve the following results. First, such activity would cause interest rates to rise sharply, which would reduce aggregate demand, increase unemployment, and slow wage and price growth through the mechanism described by the Phillips curve. Second, a tight and credible monetary policy will reduce inflationary expectations, especially those embodied in labor contracts, and signal the end of a period of high inflation. If high inflation expectations change, the economy will move into a relatively painless decline in "core" inflation.

This experiment proved to be very successful in terms of slowing down economic growth and reducing inflation. As a result of higher interest rates driven by low money supply growth, the increase in interest rate sensitive spending slowed down. As a consequence, real GDP growth stalled in 1979-1982, and the unemployment rate rose from less than 6% to its peak of 10.5% at the end of 1982. The inflation rate has dropped sharply. All doubts about the effectiveness of monetary policy have disappeared. Money works. Money matters. But this does not mean that only money matters!

What about the monetarists' claim that a tight and credible monetary policy should be regarded as a low-cost anti-inflationary strategy? Numerous studies of this issue, conducted over the past ten years, show that a tight monetary policy is effective, but the costs of its implementation are quite high. In terms of production and employment, the economic toll of monetary anti-inflationary policy was almost as great (per point of disinflation) as the costs of other anti-inflationary policies. Money works, not miracles. There are no free breakfasts on the monetarist menu.

3.4 Declining popularity of monetarism

Ironically, it was the successful completion of the experiment conducted by the monetarists to eradicate inflation in the American economy, as well as the changes that occurred in the financial markets, that caused such a change in the behavior of economic variables that destroyed the initial premises of the monetarist approach. The most significant change that occurred during the monetarist experiment (and even after it ended) was the change in the behavior of the velocity of money. Recall that monetarists believe that the velocity of money is relatively stable and predictable. This stability allows, by changing the money supply, to smoothly change the level of nominal GDP.

But it was after the recognition of the monetarist doctrine that the velocity of circulation of money became extremely unstable. Indeed, the velocity of M1 in 1982 changed more than in the previous few decades (Figure 4). The high interest rates that prevailed during this period caused various innovations in the financial sector and an increase in the number of holders of checking deposits that bring interest income. As a result, the velocity of money became unstable after 1980. Some economists believe that the velocity of money lost its stability because of too high hopes placed on monetary policy during that period.

As the velocity of money became more and more volatile, the Federal Reserve gradually moved away from using this rate as a benchmark in its monetary policy. By the early 1990s, she focused mainly on trends in output, inflation, employment, and unemployment, and used them as key indicators of the state of the economy. In fact, in 1999, in the minutes of the Federal Open Market Committee, when describing the state of the economy or when explaining the reasons for the adoption of certain short-term measures by the committee, the term “velocity of money” does not appear at all.

Nevertheless, none of these trends diminishes the importance of money as an instrument for pursuing certain macroeconomic policies. In fact, monetary policy is now a very important macroeconomic policy instrument used to manage business cycles in the United States of America and Europe.

Despite the fact that monetarism is no longer in fashion in our time, monetary policy continues to be an important instrument of stabilization policy in the economies of the leading countries of the world.

Conclusion

In conclusion, the following conclusions must be drawn:

1. Monetarists argue that the money supply is the main factor in the short-term fluctuations of real and nominal GDP, as well as the long-term dynamics of the latter.

2. Monetarist theory is based on the analysis of trends in the velocity of money, which allows us to understand the importance of money in the economy.

Despite the fact that V is clearly not constant (even because it changes with interest rates), monetarists believe that its fluctuations are regular and predictable.

3. From the definition of the velocity of money we can deduce the quantity theory of prices.

Quantity price theory holds that P is almost strictly proportional to M. This view is very useful in explaining hyperinflation and some long-term trends, but it should not be taken literally.

4. Monetarist theory is based on three main assumptions: the growth rate of the money supply is the main factor in the growth rate of nominal GDP; prices and wages are relatively flexible; and the private sector of the economy is stable. This suggests that macroeconomic fluctuations are mainly due to a disruption in the money supply.

5. Monetarism is usually associated with "free market", "non-interference policy of the state". In an effort to avoid active state intervention in the economy, considering the private business sector to be internally stable, monetarists often propose setting a constant growth rate of the money supply at about 3-5% per year. Some of them believe that this will ensure sustainable economic growth and price stability in the long term.

6. The Fed conducted a large-scale monetary experiment in 1979-1982. The experience gained convinced the biggest skeptics that money is a powerful factor in aggregate demand and that short-term fluctuations in the money supply affect output more than prices. However, in line with Lucas' critique, the velocity of money can be wildly unstable if the monetarist approach is used in practice.

List of used literature

1. Bunkina M.K. "Monetarism", Moscow, JSC "DIS", 1994.

2. Bartenev S.A. "Economic theories and schools", Moscow, "BEK", 1996.

3. Semchagova V.K. "Finance, monetary circulation and credit", Moscow, 1999

4. Usoskin V.M. "Theory of money", Moscow, "Thought", 1976.

5. Friedman M. “If money spoke…”, Moscow, “Delo”, 1999.

6. Yadgarov Ya.S. "History of economic doctrines", Moscow, "Economics", 1996

7. Paul E. Samuelson, William D. Nordhaus "Economics", Moscow, "William", 2007.

8. McConnell Campbell, Brew Stanley Economics, 2007