This follows reading Paul Krugman’s recent post. I wasn’t there. Too young, and never in America. But, nevertheless, I’ll sketch my own version of what ‘monetarism’ means to me.
- The belief that monetary policy mistakes were behind the business cycle – illustrated by Friedman and Schwartz’ chartism concluding that the Great Depression was caused by too-tight monetary policy. They were probably right about this, and this is one bit of ‘monetarism’ that has proved enduring and useful.
- A focus on the bookkeeping identity of monetary policy PT=MV. This was helpful during the years when policymakers thought that inflation was a ‘cost’ phenomenon to be tackled with prices and incomes policy. This idea also endures.
- The unfortunate idea that it follows from PT=MV that central banks could use money targets to deliver desired changes in P. These targets were ditched as it was realised, through difficult experience, that money demand [‘v’] was too unstable for growth rates in M to lead to desirable changes in P.
- Arguably, ‘monetarism’ includes, or begat a related failure to apprehend that at the zero bound money can increase without bound without affecting P.
- Alongside 3 is the view of Friedman that activist monetary policy to stabilise the business cycle was not likely to succeed because policy was hampered by long and variable lags. Not only could money growth rates deliver growth rates in prices, but this is all policy should aspire to do. This scepticism about the omniscience of policy was probably overdone, but it was a useful idea, valuable at the time when policymakers thought that armed with huge macroeconometric models they were omniscient.
As I read it, the wars over microfoundations had not much to do with ‘monetarism’. Except that those – especially in central banks – who insisted on bolting on sticky prices and wages to microfounded models cherished this old idea that Friedman and Schwartz shared.