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posted on 22 July 2017

What Remains Of Milton Friedman's Monetarism?

from the Richmond Fed

From the early 1960s until the early 1970s with the emergence of rational expectations, under the rubric of monetarism, Milton Friedman defined macroeconomic debate. Although the Keynesian consensus that he challenged has disappeared, the current academic literature makes little reference to monetarist ideas. What happened to them?

The argument here is that those ideas remain relevant but require translation into terms expressible in modern macroeconomic models and in the monetary policies of central banks, neither of which contain any obvious references to money. Moreover, the Friedman and Schwartz methodology for identifying shocks retains relevance.

As exposited by Milton Friedman, monetarism incorporated two hypotheses. One is that the price level is a monetary phenomenon in that its behavior depends upon the institutions for controlling money creation. The second is that the price system works well in order to attenuate cyclical fluctuations provided the central bank follows a rule that creates a stable nominal anchor and that allows market forces to determine real variables. Professional consensus seems assured over Friedman’s view that the severity of the Great Depression owed to contractionary monetary policy while the inflation of the 1970s owed to inflationary monetary policy. Following Friedman’s challenge to Keynesianism, economists no longer attribute failure of the price system to the replacement of competitive markets by monopolies and inflation to the exercise of monopoly power

[click on image below to continue reading]

Source

https://www.richmondfed.org/-/media/richmondfedorg/ publications/research/ working_papers/2017/ pdf/wp17-09.pdf

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