The pivotal work "A Monetary History of the United States, 1867–1960" provided the empirical backbone for the movement, meticulously documenting the correlation between money supply fluctuations and economic volatility. This "monetary rule" is viewed as a safeguard against the discretionary errors that can destabilize an economy.
Monetarist Economists and Their Money Supply Targets
The velocity of money—the rate at which money changes hands—has proven to be volatile and unpredictable, complicating the targeting of monetary aggregates. Attempts to push unemployment below this natural rate through aggressive demand-side policies are seen as futile and counterproductive, leading only to accelerating inflation without a permanent reduction in joblessness.
Key Tenets and the Natural Rate Hypothesis At the heart of monetarist thought lies the concept of the "natural rate of unemployment," a level of joblessness that exists when the labor market is in equilibrium. Monetarists advocate for a rules-based approach, specifically a constant money supply growth rate, to avoid the time inconsistency problem where short-term political pressures lead to poor long-term outcomes.
Monetarist Economists and Their Money Supply Targets
Policy Implications and Central Banking The practical application of monetarist theory revolutionized central banking, most notably during the Volcker Shock of the early 1980s. This decisive action, though initially causing a severe recession, successfully restored price stability and redefined the mandate of central banks worldwide.
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