Send your good work in the knowledge base is simple. Use the form below
Students, graduate students, young scientists who use the knowledge base in their studies and work will be very grateful to you.
Similar documents
The essence and functions of money as a system of their interrelation and interdependence. Ways to measure money. Theories of money circulation. Application of modern monetary policy in developed countries. The essence and use of the theory of monetarism in Russia.
course work, added 01/08/2015
The fundamental point of monetarism as an economic doctrine. Changes in interest rates depending on the money demand curve. The basic equation of monetarism. High efficiency of monetary regulation and trust in government policy.
test, added 08/03/2014
Role money supply in the stabilization and development of a market economy. The origins of monetarism. World famous Milton Friedman. Speed of circulation of money. Quantitative theory of prices. The main differences between monetarism and Keynesianism. Supply of money.
course work, added 05/20/2011
The concept of monetarism as a theory that justifies specific methods of regulating the economy using monetary instruments. Demand for money and its supply. Monetary policy of central banks. The policy of monetarism in practice.
test, added 01/12/2014
The theory of monetarism: evolution of development. Modern monetarism. Introduction to modern monetarism. Principles, goals and tools of monetary theory. Money demand function in the monetarist interpretation. State monetary policy.
course work, added 12/14/2005
The main provisions of the theory of regulated capitalism by John Maynard Keynes, an outstanding English economist and Nobel laureate. The theory of monetarism and economic course called Reaganomics. Neoclassical direction of economic theory.
test, added 02/03/2015
The doctrine of the era of primitive accumulation of capital. Distinctive features of mercantilism-monetarism and late mercantilism. J. Simon de Sismondi and his "New Beginnings" political economy". The economic policy of monetarism and the experience of its implementation in Russia.
test, added 03/14/2016
Monetarism is a school of economic thought that assigns money a decisive role in the oscillatory movement of the economy. Monetary means monetary (money - money, monetary - monetary). Representatives of this school see the main reason for economic instability in the instability of monetary parameters.
The focus of monetarists is on monetary categories, monetary instruments, banking system, monetary policy. They look at these processes and categories to identify the relationship between the amount of money supply and the level of total income. In their opinion, banks are the leading regulatory instrument, with the direct participation of which changes in the money market are transformed into changes in the market for goods and services.
We can say that monetarism is the science of money and its role in the reproduction process. This is a theory that justifies specific methods of regulating the economy using monetary instruments.
Monetarism is one of the most influential trends in modern economics, belonging to the neoclassical direction. He examines the phenomena of economic life primarily from the perspective of processes occurring in the sphere of money circulation.
The term “monetarism” was introduced into modern literature by Karl Brunner in 1968. It is usually used to characterize a school of economics (mainly the Chicago school) that argues that total money income has a primary influence on changes in the money supply.
Monetarists put forward the slogan “Money matters,” which became a kind of symbol of their teaching. At first glance, a sound and reasonable idea is expressed here about the important role of money circulation in the processes of economic development. In fact, supporters of the new version of the quantitative theory put a special, secret meaning into this phrase. They, as a rule, interpret money not just as a significant economic factor, but as the main, central element of the economic system, essentially determining the state of the economic situation and the entire course of the reproduction process. Monetarists actively promoted the theory of “stable money,” which has a long tradition in the history of non-Marxist economic thought. Monetarists proceed from the close causal relationship between “monetary stability” and the general economic situation, seeing monetary irregularities as the main cause of economic crises.
Some are inclined to regard Friedman's extreme position in assessing the role of money as a kind of polemical device used in the fight against Keynesianism. The promotion of money to the role of the main causal factor in the system of economic relations of capitalism is not a polemical overlap, not a temporary, transitory phenomenon. This is the essence of monetarism as a theoretical doctrine, one of its main features. The choice of the quantitative theory as the central core of the new doctrine allowed its supporters to solve a number of strategically important problems. First of all, a theoretical springboard was created for attacking the positions of the Keynesians, who, according to the monetarists, ignored the important role of money in the economic process.
The monetarist school put forward its leader and permanent leader - M. Friedman. His influence on modern economic thought is so great that many authors call the new teaching “Friedman’s counter-revolution.”
The monetarist doctrine went through a number of stages, at each of which the main attention was paid to the development of a certain range of problems. Thus, at the initial stage, which took place in the second half of the 50s and the beginning of the 60s, the main efforts were focused on developing a new Variant of the quantity theory of money, expressed in the form of a stable demand function for money. This function was, in monetarists’ constructions, an analogue of a stable and reliably predictable velocity of circulation of money, serving as a link between the money supply and nominal (monetary) income. In subsequent years, many econometric calculations of the money demand function were carried out. Most researchers have sought to reveal the validity of the monetarist thesis that this function reflects stable laws of behavior of economic entities, clearly traceable in various historical situations.
The parallel line of development of the monetarist doctrine in these years is associated with a comparison of the monetarist and Keynesian models of the economic mechanism, and an assessment of their “predictive” properties. Monetarists argued that their model of a capitalist economy was more reliable and provided a better basis for forecasting economic conditions. The work of M. Friedman and D. Meiselman, published in 1963, caused great resonance, where the investment multiplier, which serves as a key element of Keynesian models, was chosen as the main object of criticism. The authors associated investment multiplier theory with the view that "money doesn't matter." This conclusion, they emphasized, does not necessarily follow from the teachings of Keynes, but “in practice, many Keynesians tended to believe that investment did not respond to changes interest rates, and focused on the simplest version of the theory, where the stock of money was ignored and viewed as a fragment of past errors."
Friedman and Meiselman conducted a kind of test to establish which of two indicators is more reliable for forecasting the dynamics of national income - the investment multiplier (in their formulation - "the ratio of the flow of income or consumer spending to the flow of investment") or the velocity of money ("the ratio of the flow of income or consumer spending to the money supply"). For this purpose, two types of regression equations were used: one looked at consumer spending as a function of “autonomous spending” (fixed investment plus deficit state budget in the system of national accounts plus the balance of settlements with foreign countries); in another, as a function of the money supply (cash in circulation plus demand deposits plus time deposits in commercial banks). The first group of equations, according to the authors, represents the Keynesian approach, the second - the monetarist one.
Calculations based on American statistics for the period from 1898 to 1957 revealed a higher degree of correlation between consumer spending and "explanatory" variables in equations containing the money supply. From this it was concluded that "in explaining changes in national income, the stock of money is undoubtedly much more important than autonomous expenditure" (i.e. investment), that "the simple version of the income-expenditure (Keynesian) theory is almost perfect is not applicable to the description of stable empirical relationships" and that "the approach of the quantity theory to the study of changes in income appears to be more fruitful than the approach of the income-expenditure theory." Concerning economic policy.
In accordance with Friedman's positivist method, it is the predictive properties that serve as the main criterion for the correctness of the doctrine.
And here, according to the authors, “control over the supply of money serves as a much more useful tool for influencing the level of aggregate money demand than control over autonomous spending.” Another phase of the confrontation between monetarist and Keynesian doctrines concerned the question of the nature and causes of industrial cycles. In 1963, M. Friedman and A. Schwartz released under the auspices of the National Bureau economic research The United States voluminous book "Monetary History of the United States, 1867-1960", where, using enormous statistical material, they tried to prove that all major cyclical fluctuations in economic activity in the modern history of the United States were determined by chaotic fluctuations in the money supply. This step in the development of monetarism is closely related to the previous phase - the transformation of the traditional quantitative theory from a theory of the general price level into a theory nominal income. At the center of the monetarist study of the cycle is precisely the supposed causal relationship between changes in the money supply and fluctuations in the gross national product (income) in monetary terms.
Friedman and other monetarists interpret inflation as a “purely monetary” phenomenon generated by the accelerated issue of means of payment. Here the neoclassical roots of the doctrine clearly appear; its connection with the quantitative theory, which proclaims the existence of a direct and immediate connection between the amount of money and the general price level. And although the monetarist model of nominal income allows for changes in its physical component under the influence of monetary shifts, the main effect always manifests itself in the area of prices. Money in this scheme is neutral, its effect is expressed in changes in the “price envelope”.
The Keynesian position on these issues differed significantly from the monetarist one. According to the author's views" General theory", "genuine" inflation occurs only when the country's economy reaches the level of full employment; until this moment, if there is idle capacity in the economy and a large army of unemployed, the growth of the money supply in circulation will have a predominant impact not on the price level, but on the physical volume of production through changes in the interest rate. Small (“creeping”) inflation, from the point of view of Keynesians, has a useful, “encouraging” effect, it accompanies the process of economic development, growth of production and income. But in general, price theory was the Achilles heel of Keynesian teaching. Typically, the assumption of inelasticity of the price level in the short term was accepted, which eliminated the analysis of inflation and its negative consequences for the economy. In the 60s, supporters of the Keynesian approach attempted to fill this gap using the Phillips curve apparatus. The English economist A. Phillips identified a statistical correlation between the rate of change in wages and the level (rate of change) of unemployment in England for the period 1861 - 1957. Later, P. Samuelson and R. Solow replaced the rate of change in wages in the Phillips diagram with the rate of change in the price level and obtained a “modified” Phillips curve, where price dynamics are inversely related to the unemployment rate. This was what they were made of important conclusions regarding economic policy.
The thesis that the higher the inflation rate, the lower unemployment and, conversely, the slower prices rise, the more people lose their jobs, was consistent with Keynesian recipes for managing the market situation. For practitioners economic regulation the recommendation was to "slide" along the curve and select a combination of inflation and unemployment rates that was consistent with current policy goals and priorities. If, for example, it is desirable to significantly increase the level of production through expansionary measures, then price stability must be sacrificed, while allowing inflation to accelerate. If there is a need to “cool” the economy and slow down price increases, then this can be achieved by reducing production and employment. Calculations based on the Phillips curve seemed to promise a simple and accessible solution to the problem of “conflict of goals” in economic policy. Phillips, for example, believed in the early 60s that price stability in England could be ensured with an unemployment rate of 2.5%, and in the USA 7 - 8%. In turn, based on calculations of the parameters of the Phillips curve, the Council of Economic Advisers under the US President decided in 1962 to focus on a 4% unemployment rate, which, in its opinion, corresponded to “an acceptable inflation rate of 4% per year.”
Monetarists opposed the Keynesian interpretation of the Phillips curve and the portrayal of inflation as the “inevitable cost” of achieving high levels of output and employment. They rejected the idea of a "permanent trade-off" of goals, as well as the possibility of an endless balancing act between moderate inflation and full employment.
This controversy marked a new, perhaps the most important stage of the monetarist offensive. At a meeting of the American Economic Association in December 1967, Friedman proposed the existence of a “natural rate of unemployment,” which is strictly determined by labor market conditions and cannot be changed by government policies. If the government makes efforts to maintain employment above its "natural" level through traditional fiscal and credit methods pumping up demand, then these measures will have a purely short-term effect and will ultimately only lead to higher prices.
An important place in Friedman's reasoning was given to inflation expectations - assumptions about the future rise in prices that are formed in the minds of participants in economic turnover. In their constructions, Keynesians did not attach importance to the reaction of economic agents to the depreciation of money. For monetarists, these processes took center stage. They put forward the idea of the adaptive nature of expectations, which, in their opinion, are based on past experience and depend entirely on the rate of price changes in the previous period. According to this version, the higher the inflation rate, the more the participants in the reproduction process take into account the upcoming price increase in their forecasts and actions and try to neutralize its consequences with the help of special clauses in employment agreements, business contracts, etc. Therefore, over time, the redistributive and stimulating effects of inflation that the government is counting on weaken. In order to activate them, government bodies are forced to resort to new, “sudden” inflationary “shocks” that are not taken into account in economic agreements and contracts for hiring labor. This leads to larger doses of deficit financing from the budget, causing a never-ending inflationary spiral. In this regard, Friedman's theory received the name "acceleration doctrine", i.e. doctrine of ever-accelerating inflation rates. To break the vicious circle, Friedman recommended ending the “senseless” demand-stimulating policies and removing the slogan of achieving high levels of employment from the agenda.
The Phillips curve controversy is closely related to monetarist policy recommendations. Friedman made his first statements on these issues in the article “Monetary and Fiscal Foundations of Economic Stability” (1948), and then in a series of lectures given at Fordham University in 1959. As fundamental principle policy in the monetary sphere there the idea of the so-called monetary rule was formulated, i.e., an increase in the money supply at a constant pace, regardless of the state of the market and the phase of the cycle.
The war that monetarists waged for many years against “fiscalism,” as they called Keynesian policies emphasizing fiscal methods, also had its stages. At first, among the monetarists' arguments regarding the inconsistency of this policy, emphasis was placed on the unpredictability of the results of government measures due to the presence of delays (lags) in the manifestation of the effect of these measures, as well as reference to the ineffectiveness of tax and other budget methods regulation. Later, the effect of crowding out private (non-state) investments due to the diversion of large material and monetary resources into the sphere of government operations came to the forefront in the system of evidence. The essence of this argument was as follows: what the economy gains from increased public investment, it loses due to the simultaneous reduction in spending of the private capitalist sector.
In the mid-70s, the confrontation between the Keynesian and monetarist schools was already directly manifested in the field of practical measures of economic policy.
In the late 70s and early 80s, an indicator of the sharply increased popularity of monetarism was the use of its prescriptions in the formulation of economic policy. Widespread in the practice of central banks various options monetary rule. This led to significant changes in the strategy of economic regulation in capitalist countries. The tactics of activism and energetic demand management to correct market “distortions” and accelerate the rate of economic growth have lost their attractiveness. There was a turn towards “gradualism” and “restraint” in the implementation of policy, accompanied by a “squeeze” of the money supply and credit restrictions.
The accelerated rise in prices undoubtedly contributed to a change in the mood and preferences of various strata of capitalist society and favored the spread of monetarist ideas, while the Keynesians’ persistent ignorance of the negative consequences of inflation undermined their position in the eyes of public opinion. But the reasons for the rapid growth of monetarism's popularity are much deeper. Their roots should be sought in the deterioration of the general conditions of capitalist reproduction, which led to a change in the strategic line of the ruling circles of capitalist countries, their sharp shift to the right.
Pace economic growth fell significantly in the 70s. A number of unfavorable factors have emerged - a shortage of important types of raw materials, a shortage of energy resources, and some food products. Competition has intensified and sales difficulties in domestic and global markets have increased. The intensity of the class struggle increased significantly, and the number of bankruptcies increased. At the same time, production efficiency and labor productivity decreased. The holy of holies of capitalist entrepreneurship - the rate of profit - was under threat.
Under these conditions, the Keynesian slogan of full employment was replaced by the goal of ensuring the stability of purchasing power monetary unit. The leaders of the monopolies set a course for unleashing the elements of the market, curtailing government social programs, termination of policies to stimulate economic growth. Theoretical frameworks have gained popularity calling for a revival of neoclassical principles that sharply limit government intervention in economic process. Monetarism became an important part of the "new conservatism".
We find a detailed list of properties in Friedman’s lecture “Counter-revolution in monetary theory”:
- 1) There is a “consistent, although not absolutely precise, relationship” between the rate of growth of the quantity of money and the rate of growth of nominal income;
- 2) Changes in nominal income follow changes in the money supply with a delay of 6 - 9 months. In the short term, shifts affect mainly production, and in the long term - on prices;
- 3) Inflation “is always and everywhere a monetary phenomenon,” being associated with the rapid growth of money compared to production. At the same time, an increase in government spending may or may not have inflationary consequences, depending on whether they are covered by additional money issuance;
- 4) The “transmission mechanism” of the influence of monetary shifts on the amount of nominal income is associated with changes in the relative prices of a wide range of assets, and not just with changes in the interest rate; these changes (which, as we recall, were emphasized by the Keynesians) serve as a “deceptive and unreliable” guide for monetary policy.
Friedman stated that, as a first approximation, the quantity theory is “not a theory of production, money income, or prices,” but a theory of the demand for money. The search for a stable demand function for money marked the beginning of an open confrontation with Keynes, whose demand for liquid assets(due to the presence of a speculative motive) depends on the rapidly changing and unpredictable moods of economic agents. Monetarists, on the contrary, put forward the assertion that “the demand for money is extremely stable even under very unfavorable conditions,” considering this as a guarantee of the stability of the economic mechanism.
It is important to emphasize that a stable money demand function serves only as another way of expressing the idea of a constant velocity of money, which has always been a key premise of the quantity theory. However, in the monetarist version, strictly determined speed formulas are replaced by a probabilistic relationship that allows significant fluctuations in the numerical values of this indicator. Referring to the results obtained by F. Keygen, Friedman argued, for example, that the repeatedly observed jumps in the velocity of money during periods of hyperinflation do not contradict the understanding of stability as a stable functional relationship between the demand for money and a number of independent variables.
In constructing a model of the demand for money, Friedman analyzes the behavior of two types of economic agents - households (or “ultimate wealth-owning units”) and capitalist firms. In his interpretation, for the former money is one of the forms of storing wealth, for the latter it is a capital asset, “a source of production services.” In both cases, money, in the spirit of the Cambridge tradition, is analyzed not in movement (not as a “flow”), but as a momentary indicator (“stock”), being a component of a portfolio of accumulated and interchangeable assets.
For Keynes, the choice procedure is extremely simplified - money or “bonds” (i.e. debentures generating interest income). For Friedman, the economic individual has a wider range of alternatives. In his portfolio, along with money, there are bonds, stocks, inventory, "human capital". Each individual distributes income in accordance with his system of priorities, his tastes and preferences. At the same time, he is also guided by considerations of the long-term profitability of each type of asset, and an assessment of the “flow of services” that he hopes to receive from them.
The main element of a portfolio in the monetarist model is money. They provide the owner with a guarantee of payments, create a liquidity reserve in case of unforeseen circumstances, etc. The expected receipts from this form of wealth are indicated in the demand equation rm The value of money, its purchasing power, is inversely related to the price level (P). Monetarists usually take into account the influence of this factor, operating with “real” values of cash balances. The concept of “human capital” is associated with “investment in people”, expenses for acquiring knowledge, improving health, etc.
Income from bonds and stocks comes in the form of interest payments and dividends (rb and re). Products generate a “service flow” in kind. In addition, they are subject to depreciation or appreciation when commodity prices change. Therefore, the rate of change in the general price level (1/P * dP/dt) is introduced into the equation. As for “human capital,” Friedman operates with the variable w, designed to reflect the relationship between the “human” and “physical” elements of capital. The amount of real (taking into account price changes) income to be distributed is denoted by y, and the variable representing unaccounted factors, tastes and preferences of economic entities is denoted by i.
As a result, the equation for the demand for money for “individual owners of wealth” takes the following form:
M/P = f (y,w;rm,rb,re;1/P*dP/dt;u)
where M/P - real cash balances; y - national income in constant prices; w is the share of the “physical” component of national wealth; rm is the expected nominal rate of return on cash balances; rb - expected nominal rate of return valuable papers fixed income (“bonds”); re - expected nominal rate of return on shares; 1/P * dP/dt - expected rate of change in the level of commodity prices; and - other factors affecting the demand for money. The equation can easily be converted into an equation for the velocity of money (V), calculated as the velocity in the circulation of income (Y/M). The factors influencing the demand for cash balances remain valid for the velocity of money circulation, which, as we have already said, serves in the monetarist model only as another way of expressing the need for cash balances.
The second category of agents accumulating money are capitalist firms. Friedman recognizes that in the circulation of funds of a capitalist enterprise, money plays a qualitatively different role than for consumers. However, using a number of simplifications, the demand of the business sector is reduced to an equation. At the same time, only the coverage of unaccounted factors (and) expands.
Combining the demand for cash balances of various categories of economic agents meets the principles of the monetarist approach, where preference is given to aggregated indicators. However, even at a high level of abstraction, such aggregation requires significant caveats.
In the aggregated models of demand for money used by monetarists, social structure capitalist society is not taken into account. Meanwhile, the dynamics of various economic factors can have a completely different impact on the demand for cash balances on the part of a financier playing on the stock exchange, or a low-paid employee or farmer. The reaction to changes in individual factors and representatives of different social strata within each class varies. These aspects of the Friedman equation are not taken into account.
Friedman also ignores the difficulties associated with extending the individual demand function derived for one “standard” agent to the entire economy. He admits, however, that the final result of aggregation “depends on the distribution of units over a number of variables.” For example, the expectation of inflation varies among different participants in the turnover: “w and y clearly and significantly differ for individual units.” But even in this case, Friedman refers to the high level of abstraction of his analysis, which, as it seems to him, frees him from the need to take these differences into account.
Friedman considers one of the advantages of his approach to be the consideration of the theory of money as “a special topic in the theory of capital.” In Marxist political economy, which provides a deep scientific analysis of the system of concepts of the capitalist mode of production, it is shown that capital is a socio-economic category characteristic of a certain type of production relations and receiving full development under capitalism. Capital is understood as self-increasing value, i.e. value that brings surplus value based on the exploitation of hired labor. Friedman uses an ahistorical and naturalistic interpretation of capital, coming from the works of Böhm-Bawerk and Fischer, where capital is understood as any thing that brings a “stream of income” in the form of money, goods or specific services. Accordingly, he has money - " capital asset", part of the accumulated capital fund, along with bonds, shares, real estate, durable consumer goods, etc. Meanwhile, money, without being capital, can serve as a means of payment, mediating metabolism in the economic system.
In a 1956 paper, Friedman charts a path for transforming the stable money demand function into a theory of “money income determination,” in which changes in the money supply in circulation are the primary cause of cyclical fluctuations in GNP at current prices. In justifying such a transition, an important place is occupied by the traditional quantitative assertion that the supply of money (money emission) is exogenous in nature, in other words, it is determined autonomously, outside the economic system. This is an important condition in the system of evidence of unidirectional causality: from money to prices and income. In addition, Friedman hypothesizes that the demand for money is inelastic with respect to some arguments of the derived function, which allows him to negate the influence of the interest rate.
In constructions of this type, the contours of the old dogmas of the quantitative theory clearly appear, although they are expressed in a more complex and veiled form. The previous formulas are replaced by a “more modern” functional connection like M = f (Y, x)*, but the essence does not change. Monetarists reduce the most complex mechanism of social production to a simplified scheme “money - money income”, which also includes the old causality formula “money-prices”.
Raising the question of dividing the effect of changes in the money supply between the physical and price components of income, Friedman seeks to show that he is not alien to the spirit of the times and is ready to make some adjustments to the quantitative theory. This is a kind of concession to Keynesianism, but the concession is more formal than actual. Keynes argued that as long as there is unemployment in the economy, changes in the quantity of money will affect not the level, but the volume of production and employment. Unlike the old quantitative scientists, Friedman recognizes the legitimacy of posing this problem, but believes that the modern analytical apparatus does not allow it to be solved. Hence the general formulation that “income in monetary terms is a mirror image of changes in the nominal quantity of money.”
With the advent of monetarism, the search for a stable money demand function became one of the most popular areas economic analysis in the capitalist world. “The presence of a stable demand function,” write J. Judd and J. Scadding, “means that the quantity of money is associated with a small group of key variables, which in turn connect money with the real sector of the economy.” The discovery of such a connection strengthens the position of those who believe that money is important and effective means impact on the state of economic conditions.
Authors of empirical works on the demand for money usually seek to answer a number of questions that are of particular interest for a meaningful interpretation of the results obtained. This, in particular, includes such issues as the choice of the “best” indicator of the money supply, which ensures a reliable connection between the parameters of the demand equation; understanding the role of interest rates in shaping the demand for cash balances and estimating the elasticity of demand for interest; determination of an adequate indicator of economic turnover or stock of assets, etc.
The results of empirical calculations are important for assessing theoretical hypotheses. Thus, obtaining “statistically reliable” money demand equations using a narrow measure of the money supply is usually interpreted as evidence of the preference for transactional models of demand. If the best results are given by equations with a broad indicator of money (including urgent and savings deposits), then they are more favorable for supporters of the portfolio approach. On the other hand, the identification of high interest elasticity of money demand reinforces the Keynesian position.
An example of a monetarist interpretation of the money demand function is the work of M. Friedman in 1958. It indicates the presence of a strange and difficult to explain phenomenon - a discrepancy in the long-term and cyclical dynamics of the velocity of money in the United States during the period 1870-1954. The author points out that changes in the velocity of money and real (in constant prices) GNP coincided within the market cycle, but went in opposite directions if we take the entire period as a whole. In an attempt to explain this contradiction, Friedman first turns to a search for factors that, other than real income, could influence changes in speed within the market cycle. He denies the importance of interest rates, arguing that "their cyclical nature makes them unlikely to be responsible for large, frequently repeated, and synchronous changes in the velocity of money over the course of a cycle."
Money in Friedman's image is the most inertial element of the asset portfolio. In his model, cash balances are not a “shock absorber” or “shock absorber” for temporary fluctuations in income. He proposes a hypothesis that the demand for money is determined not by ordinary (“measurable”) income, but by its stable part - the so-called permanent income. The latter is calculated as a weighted average of a number of income levels for the current and previous years with weights decreasing exponentially as one moves away from the present period. In other words, when presenting a demand for money, economic entities are guided not by immediate, but by past income, which corresponds to the adaptive model of forming expectations. This hypothesis, in the author’s opinion, contains the answer to the observed discrepancies in speed dynamics in the long-term and cyclical aspects.
The permanent income hypothesis underlies Friedman's money demand equation, where real permanent per capita income "explains" the vast majority of fluctuations in money demand.
Friedman's methodology has been subject to serious criticism on several occasions. A number of authors have assessed the high elasticity of demand with respect to income and its complete “insensitivity” to the interest rate as a result of the use of smoothed series of constant income, “constant” prices and a broad indicator of money. It was pointed out that in the course of econometric calculations, the effect of interest rates largely disappears due to the inclusion of time deposits on which interest is paid in the money supply indicator. At the same time, despite Friedman's findings, many researchers have found a statistically significant connection between the demand for money and changes in interest rates. Thus, A. Meltzer, using in his calculations the demand function for money in the USA for 1900 - 1958. Friedman's estimates of permanent income and long-term rates, concluded that interest plays an important role. This conclusion is confirmed by other researchers. Summarizing the results of many empirical works on the demand for money, D. Laidler writes: “Regardless of whether income, wealth or permanent income are used as a constraint in the calculation of the money demand function, whether the money supply is defined broadly or narrowly, whether short-term or long-term interest rates, indicators of expected rates of price growth, yields on liabilities of financial intermediaries, interest rates in foreign markets, returns on stocks or even an index of the level and structure of interest in general, there is comprehensive evidence that the demand for money is consistently linked feedback with the opportunity cost of holding money. Of all the problems of calculating the demand for money, this problem seems to have been solved most thoroughly." Thus, Friedman's "anti-Keynesian" conclusion about the insignificant effect of interest rates on money demand was not confirmed in subsequent studies.
By the beginning of the 70s, the question of the existence of a stable demand function for money seemed finally resolved. Princeton University professor S. Goldfeld conducted a thorough study of the demand for money in the United States in 1973 using quarterly data for the period 1952-1972. and obtained good statistical results for the equations.
In the early 1980s, new evidence emerged of the instability of the demand function for cash balances. In 1982, the velocity of money, calculated as the ratio of GNP to the narrow monetary aggregate M1, fell by 4.7% for the first time in 35 years. This was seen as another blow to the monetarist concept. The new “shift” of the demand function coincided with the publication of a book by M. Friedman and A. Schwartz, devoted to trends in the development of the monetary sphere in the USA and England over a period of more than 100 years. The main ideas of this book are based on the concept of stability of the speed indicator. As D. Batten and C. Stone wrote, “it would be an irony and a mystery” if, at the time of the publication of this book, it was discovered that “fundamental connections had suddenly disintegrated.” The authors point out the widespread view that "recent financial innovations and the increased application of earlier innovations of this kind have led to such a distortion of the very concept of money and its indicators that the assertions of monetarism are no longer valid." The opinion about “undermining the position of monetarism” began to spread in the popular press.
When assessing the situation in the monetary sphere, the demand for money is only one blade of the scissors, the other is the supply of money. In the monetarist doctrine, along with the thesis about a stable demand function for cash balances, an extremely important and necessary component is the provision about the exogenous (i.e., autonomous, not related to the functioning of the economy) nature of the formation of the money supply. As N. Kaldor noted, “Friedman’s persistent attempts to substantiate the quantity theory with the help of a stable demand function for money or a stable rate ... are critically dependent on whether the quantity of money is an exogenous quantity, established at the discretion of the monetary control authorities, regardless of the demand for money". Monetarists emphasize the independent nature of changes in the money supply, using conditional analytical techniques for introducing money into circulation channels. In "The Optimal Amount of Money," Friedman demonstrates the idea of "imposing" money from outside with the example of it being dropped from a helicopter and distributed evenly among the population. This method of emission is intended to emphasize the primacy of changes in the money supply in relation to subsequent shifts in the production or circulation of the social product. It is interesting to note that similar methods of demonstrating the independent nature of money emission were characteristic of many supporters of the traditional quantitative theory (from D. Hume to I. Fisher). A favorite example that can be found in their works is doubling the amount of money in the population “over one night,” followed by consideration of the reaction of economic agents to this event.
The popularity of “helicopter money” falling to the ground like manna from heaven can be explained simply. The imposition of money on the economy by force makes it the main causal factor of economic changes. And on the contrary, if money passively follows changes in economic activity, the automaticity of the quantitative scheme is violated. Therefore, the idea of “monetary shocks” with the subsequent adjustment of the price structure to them is invariably present in all variants and modifications of the neoclassical theory of money.
Friedman repeatedly emphasized the fact of the “independence” of the supply of money from the factors of demand for cash balances. In a 1956 article he refers to various kinds technical specifications issue of money, on “political and psychological moments” that determine the actions of the central bank. Other work criticizes the Keynesian approach, where the quantity of money is passively "adapted to the needs of trade."
The idea of the autonomy of money is consistently pursued within the framework of a more general theme of the monetarist paradigm, namely the interpretation of money as a causal factor in cyclical fluctuations in the market. Referring to the position of I. Fisher, who in the 30s called the economic cycle the “dance of the dollar,” in other words, a reflection of changes in the purchasing power of money, Friedman asks the question: “Is the cycle primarily a reflection of the “dance of the dollar”? dollar," or, on the contrary, does the dollar repeat the dance of the cycle in its main features?" If we omit the verbal camouflage and protective clauses, then the monetarists’ conclusion boils down to the assertion that it is shifts in the money supply that determine all major changes in the economic situation, or, following Fisher’s terminology, the economy “dances” to the tune of money! This scheme is based on the principle of complete autonomy of the money supply.
It is not surprising that monetarists are hostile to any mention of the credit nature of modern money, since it is with such money that the idea of a passive reaction of the money supply to changes in trade turnover is associated. And this contradicts the exogenous principle of issuing means of payment in monetarist schemes. Lack of understanding of the close relationship and mutual conditionality of monetary and credit circulation leads to theoretical confusion in such an important issue for monetarists as the concept of money supply. The Monetary History of the United States gives a broad and essentially meaningless definition of money as “a temporary abode of purchasing power, enabling the act of buying to be separated from the act of selling.” The emphasis of the book's authors on the "reserve" function of money leads to the loss of clear criteria for separating money from non-money, which gives them complete freedom in choosing the "necessary" unit. “The definition of money,” write Friedman and Schwartz in another work, “should be chosen not on the basis of any principle, but based on considerations of usefulness in organizing our knowledge of economic relations. “Money” is something to which we attach a numerical value with by means of a conditioned procedure."
What should be considered when constructing an appropriate statistical aggregate? Monetarists answer this question utilitarianly, using the principle of “best statistical fit.” “The simplest method is to choose the value that gives the highest correlation value...” Analyzing the problem of including time deposits of commercial banks in the money supply, the authors propose to measure the correlation between the income indicator and two monetary aggregates: a) money supply without time deposits and b) money supply including time deposits. "If it turns out that b) is more closely correlated with income, then, according to this criterion, it is necessary to apply a broader measure of the money supply..."
In accordance with this principle, monetarists in most of their empirical works use a broad monetary aggregate, including cash and all types of deposits of commercial banks. However, they cannot satisfactorily explain why the concept of “temporary repository of purchasing power” should include time deposits of banks, but should not include similar obligations of other financial institutions. As Tobin wittily noted, it seems that monetarists are saying: “We don’t know what money is, but whatever it is, the supply of it should grow steadily at 3 to 4% per year.”
Among the most common arguments in defense of the exogenous nature of the money supply is the assertion that central bank can effectively control the amount of money and ensure the “right” level of means of payment in circulation. D. Fand, for example, considers the thesis about the ability of the central bank to strictly control the nominal money supply to be one of the most important provisions of the monetarist doctrine. This is just another way of expressing the idea that the quantity of money is determined exogenously, in accordance with the principle of discretion.
To demonstrate the ability of a central bank to purposefully regulate money circulation, monetarist literature widely uses the scheme of a money multiplier based on the regulation of the “monetary base” or “high-powered money”. They include the amount of cash issued into circulation, as well as balances in reserve accounts of commercial banks with the central bank. These components are, by law, a means of securing bank deposits. Since the central bank can influence the value of the base, and deposits are treated as a derivative of the base, it is assumed that the monetary authorities are always able to adjust the money supply in the desired direction. The relationship between the money supply and the reserve base is expressed by the formula
where M is the amount of money, B is the base, and m is a coefficient (multiplier) reflecting the quantitative proportions of the ratio of the base and the total amount of money in circulation.
The idea of a multiplier effect with changes in the amount of bank reserves was expressed back in the 20s, during the formation of the US Federal Reserve System. However, unlike previous interpretations of the reserve multiplier, modern monetarists seek to strengthen the economic interpretation of this indicator by linking its value with a number of functional parameters expressing the behavior of various types of economic agents - banks, non-financial companies, and the state. These include, in particular, the cash ratio C/D (the ratio of the amount of cash C to bank demand deposits D) and the reserve ratio R/D (the ratio of the amount of bank reserves at the central bank R to total amount deposits D).
The “base-multiplier” model plays an important role in substantiating the monetarist thesis about the autonomous nature of the money supply. Thus, F. Keigen, analyzing changes in the base and two “behavioral” coefficients (cash and reserves) in the United States for the period 1875 - 1960, came to the conclusion that 9/10 of all changes in the money supply were due to changes in the base and only 1/ 10 changes - for other reasons. As for the reserve base itself, according to his estimates, its shifts before 1914 were determined primarily by fluctuations in the gold reserve, and since the creation of the Federal Reserve System - by the portfolio of government securities held by the Federal Reserve Banks. Other authors who used similar methods of analysis came to the same conclusions. The dominant influence of the base is interpreted as clear evidence of the central bank’s ability to control the process of money emission and direct it at its own discretion.
Monetarist concept The emission mechanism was sharply criticized by the authors of the post-Keynesian school. Keynes himself did not pay special attention mechanism for issuing money. In his works, the money supply was considered as an exogenous quantity. Post-Keynesians changed this approach. They focused their fire on the most vulnerable link of the concept—the assertion that there is no stable line of causality running from the economy to the size of the money supply. One of the papers, prepared by a group of scientists at Yale University led by J. Tobin (G. Johnson called these works “the belated counter salvo of the Yale School against the Essays on the Quantity Theory of the Chicago School”), says: “The quantity of money, as usual define, is not an autonomous quantity controlled by government authorities, but an endogenous, or “internal” parameter reflecting the behavior of private economic institutions."
The idea of the endogenous nature of money emission was developed in detail by N. Kaldor in his critical work on monetarism. The author draws a hard line between the monetarist scheme and the Keynesian model, which represents an “economy based on credit money.” “In an economy with credit money, the money supply is not exogenous, but endogenous; it changes in direct proportion to the public’s “demand” for cash and bank deposits, and not independently of this demand." Kaldor rejects the monetarist assumption that the superstructure credit money varies in direct relation to the base money, whether the latter is identified with the gold in the vaults of the central bank or simply with the amount of notes put into circulation by discounting bills or by open market operations. He believes that the central bank itself is forced to passively adapt to demand, since, as a lender of last resort, it cannot refuse to rediscount commercial bills presented to it. Moreover, according to Kaldor, in an economy with credit money, "unwanted or excess amounts of money could not remain in circulation at all; an increase in the money supply is determined by an increase in the cost of transactions, regardless of whether it is associated with an increase in costs or volume of production ..." . Kaldor does not allow the idea of "monetary roots" of inflation. Like other Keynesians, he attributes rising prices solely to rising production costs.
The polemics between monetarists and Keynesians on the issue of money emission is doctrinaire and superficial. Representatives of each faction, in the heat of argument, deliberately simplify the picture, snatching out and absolutizing individual features monetary mechanism. The modern process of formation of the money supply is very complex and is influenced by diverse economic forces, acting in different, sometimes opposite directions. There is no doubt that the credit nature of the modern emission mechanism determines a strong, in many cases, determining influence on the part of the capitalist economy. The need for cash balances is ultimately decisive in the formation of a stock of means of payment. But only in the end! Credit channels for issuing money do not guarantee full compliance of this issue with the demand of the economy and do not eliminate the independence and autonomy of processes in the monetary sphere, or their reverse influence on the market situation. Contrary to Kaldor's assertions, monetary imbalance is a real fact.
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
significantly faster than production volume.
Milton Friedman
Financial and monetary systems need management. Government bodies, including the Central Bank, have to make fundamental decisions regarding the formulation of the monetary standard, the determination of the amount of money in circulation, the establishment of exchange rate rules, the management of international financial flows, as well as determining the degree of hardness or softness of its credit monetary policy.
Today there are different opinions about the preferability of one or another management method monetary sphere. Some experts believe in an active policy, when when there is a threat of inflation, the growth rate of the money supply should be slowed down, and vice versa. Others are quite 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, particularly monetarism and the theory of rational expectations (RET). The development of these theories was led by outstanding world-famous scientists. Thus, the Keynesian concept of employment without stabilization policies, which dominated after the Second World War in the macroeconomic views of most economists in all countries with market industrial economies, was developed by a group of five future Nobel laureates - Paul Samuelson, Franco Modigliani, Robert Solo, James Tobin and Lawrence Clive .
The 1976 Nobel Prize winner in economics, Milton Friedman, who became the intellectual leader of the monetarist school, held different views. 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 assumed.
But economic thought does not stand still; after some time, Robert Lukes, Thomas Sargent and Neil Wallace developed the theory of rational expectations (TRO), which is part of the so-called new classical economic theory.
The purpose of the course project is to become familiar 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 50s. 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 70s and early 80s, as well as in the early 90s during the transition to a market economy in Russia.
The pinnacle of the theoretical developments of monetarism were the concepts of stabilizing the American economy and the well-known “reagonomics”, the implementation of which helped the United States to weaken 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 supply of money 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 in 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 changes in aggregate demand are influenced by many factors, while monetarists argue that the main factor influencing changes in production volume and prices is a change in the supply of money.
1.1 Milton Friedman
Milton Friedman (born 1912) is an American economist, winner of the 1976 Nobel Prize in Economics, awarded “for his research into 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 Resources 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. - employee of the Ministry of Finance as part of a group of tax researchers. From 1943 to 1946 he held the position of deputy director of the group of statistical studies of the military sphere at Columbia University, where he received his doctorate (1946).
In 1946 he returned to the University of Chicago as a professor of economics, remaining in this position to this day. And his world fame was brought, first of all, by his works on monetarist topics. These include a collection of articles published under his editorship, “Research in the Field of the Quantitative Theory of Money” (1956), and a book, co-authored with Anna Schwartz, “History monetary system USA, 1867-1960" (1963). Friedman's monetary concept, in the words of the American economist G. Ellis, led to the "rediscovery of money" due to almost universally growing, especially in the last period, inflation.
The name of M. Friedman, a 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 the opportunity to write a weekly column in Newsweek magazine, which became, as it were, a propaganda mouthpiece for his monetarist theory.
Meanwhile, M. Friedman is multifaceted in his work and, what is very important, his scientific interests also cover the field of methodology economic science. After all, for many years now, in their discussions on this problem, economists have not been able to do without analyzing 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. Allais (1990), or the famous lecture given by P. Samuelson at the ceremony of awarding him the Nobel Prize in Economics (1970 ), and etc.
However, it is precisely from M. Friedman’s positivist methodological essay that one can glean extraordinary judgments that economic theory as a set of meaningful hypotheses is accepted when it can “explain” factual data, only from which it follows whether it is “correct” or “wrong” and whether it will be "accepted" or "rejected"; that facts, in turn, 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 descriptive rather than predictive, turning it into simply mathematics in disguise, is obvious. 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 nature 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, must be discussed in psychological rather than logical categories and, when studying autobiographies and biographies, stimulate it with the help of aphorisms and examples.
1.2 Velocity of money
The position of monetarists on the issue of the velocity of circulation of money is interesting. The variability of this indicator played an important role in the decline in the authority of quantity theory in the 30s. Modern monetarists recognize the possibility sharp fluctuations rate indicator, for example, during periods of acute inflation.
Sometimes money moves very slowly. They are kept for a long time in the bank at home or in bank accounts, used only to pay for some purchase. If a period of inflation sets in, they try to spend money as quickly as possible, and it begins to change hands at breakneck speed. The concept of "money circulation velocity" was proposed at the beginning of the last century by Alfred Marshall of Cambridge University and Irving Fisher of Yale University. Using this concept, one can measure the speed at which money changes from one owner to another or circulates in the economy. If the quantity of money is large in comparison with the amount of expenditure, then the velocity of circulation will be low; if money turns around quickly, then its circulation speed 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 in relation to total income or production volume. Formally it looks like this:
V ≡ GDP/M ≡ (p1q1 + p2q2...)/M ≡ PQ/M,
where P - average level prices; and Q is real GDP. The velocity of money (V) is defined as the annual nominal GDP divided by the quantity 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 specific example. Suppose that a country produces only bread and its GDP consists of 48 million loaves of bread, each of which sells for $1, which means that GDP = PQ = $48 million per year (i.e., if the volume of money mass is equal to 4 million dollars. Then, according to the definition, V = 48 million dollars / 4 million dollars = 12 times a year). This means that money turns over once a month, while the population spends its income on purchasing 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 M2 monetary supply has remained remarkably stable. At the same time, the circulation speed 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 theory of prices
Now let's look at how some economists who have worked on this problem in the past have used the "velocity of money" to explain the dynamics of the general price level. The basic 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 expenses over a certain period of time. If people receive their income once a month and spend it evenly throughout 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 GDP increases several times, this will not affect the temporary distribution of expenses in any way, the velocity of money circulation will remain unchanged. The velocity of money will only change when individuals or businesses change their spending patterns or the way they pay their bills.
This view of the state of affairs 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 = MV/Q- (V/Q)M = kM.
This equation follows from the money velocity equation already discussed by substituting the more compact k for V/Q and solving a new equation for P. Many classical economists believed that if the methods of payment for concluded transactions remain unchanged, then k is constant. In addition, their opinion was based on the assumption of full employment, which means that real output should increase smoothly and equal potential GDP. Combining these premises, we can say that in the short term k (= V/Q) remains practically unchanged, and in the long term it grows smoothly.
What conclusions can we draw from studying quantitative theory? As can be seen from the equation, if k is constant, then the price level changes in proportion to the money supply. If the money supply is stable, prices will be stable. If the supply of money increases, prices will rise accordingly. This means that if the money supply increases ten or a hundred times, the country will experience galloping inflation, or hyperinflation. Indeed, the quantitative theory of money is most clearly illustrated by hyperinflation. From Fig. 2 shows that prices in Germany in 1922-1924 increased a billion times precisely after its Central Bank launched the 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 remember the fact that money is fundamentally different from ordinary goods such as bread or cars. We buy bread as food and cars as personal means of transportation. If prices in Russia today are a thousand times higher than they were a few years ago, then it is only natural that people now need a thousand times more money to buy the same amount of goods as they did in the past. This is the essence of the quantity theory of money, the demand for money increases in proportion to the price level.
The quantity theory of money and prices states that prices change in proportion to the money supply. Although this theory is only a rough approximation of reality, it helps explain why countries where the money supply increases slowly have moderate inflation, while countries where the money supply grows quickly experience runaway inflation.
2. Modern monetarism
Modern monetarist economics emerged after World War II. Monetarists challenged Keynesianism by emphasizing the importance of monetary policy in stabilizing the economy at the macro level. About twenty years ago, a split occurred in the monetarist movement. One part of it remained faithful 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 growth 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 an analysis of trends in changes in the velocity of circulation of money. Monetarists believe that the velocity of money is stable
(or in as a last resort is constant). If this premise is true, it has important, since the quantity 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, like all other schools, has its own characteristics. Here are several theses that occupy a central position in monetarist theory.
· The growth rate of the money supply is the main factor in changes 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 supply of money. Fiscal policy is very important in terms of only some aspects, such as how much of GDP will be allocated to military spending or private consumption. And the main macroeconomic variables (total output, employment and price level) depend mainly on the quantity of money. This state of affairs in a simplified form can be formulated as follows: “Only money matters.”
What is the monetarists’ belief in the primacy of money based on? It relies on two assumptions. First, as Friedman writes: “There is an extraordinary stability, confirmed by research, characterizing the regularity of such quantities as the velocity of circulation of money, which will be of interest to any specialist working with data characterizing the circulation of money.” Second, many monetarists typically claim that the demand for money is completely unresponsive to changes in interest rates.
Let's look at why these assumptions lead to these conclusions. According to the quantitative equation, if the velocity of circulation (V) is stable, then M will be the only factor determining PQ, i.e. nominal GDP. Likewise, fiscal policy, according to monetarists, is not effective, since if V is stable, then the only force that can influence PQ is M. Thus, with a constant value of V, taxes and government spending have no chance of having any effect. or influence on the development of events.
· Prices and salary rates are relatively flexible. One of the main provisions of Keynesianism is related to the “slow mobility” of prices and wages. Despite this, monetarists believe that prices and wages have a certain inertia, and argue that the Phillips curve slopes relatively steeply even in the short run, and also insist that it is vertical in the long run. Within the AS-AD model, according to monetarists, the short-term AS curve is quite steep. The monetarist approach combines the two previous points. Since money is the main factor in nominal GDP, and prices and wages are relatively flexible as they approach potential output levels, money has a small and short-term impact on real output. M affects mainly R.
This means that money can have some impact on output and prices, but in the short run. In the long run, due to the fact that the economy tends to remain at full employment, money can only have the greatest impact on the price level. Fiscal policy has little impact on production and prices, both in the short and long term. 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 usually the result of government activities, especially changes in the money supply, which depend on the policies pursued by the Central Bank.
2.2 Monetarism and Keynesianism
What is the difference in the views of monetarists and supporters of Keynesian theory? In fact, after the rapprochement that has occurred over the past three decades, there are no major disagreements between these schools, and the disputes between them now concern more the placement of emphasis than fundamental differences.
However, we can identify two main differences.
Firstly, among representatives of the two schools there is no unity regarding the forces that influence aggregate demand. Monetarists believe that aggregate demand is influenced solely (or mainly) by the supply of money and that this influence 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 the price level.
Keynesians, on the contrary, are of the opinion that everything is much more complicated. While they agree 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 influence on output, but no more than such variables influencing the level of aggregate spending as fiscal policy and net exports. They also point to good evidence that V systematically increases as interest rates rise, and therefore holding M constant is not sufficient to ensure constant nominal or real GDP. One of the most interesting examples of the convergence of the views of Keynesians and monetarists is their belief that stabilization policy can achieve its goals through a more active use of monetary policy instruments.
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 Keynesians exaggerate the sluggishness of prices and wages and that the short-run AS curve has a much steeper slope than Keynesians claim, although it may not be vertical.
Disagreement over the slope of the AS curve has led to the two schools of thought having different views 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 little change in the price level. Monetarists argue that a shift in the aggregate demand curve, as a rule, ends with a change in the price level, and not in the volume of production.
The essence of monetarism is that all the attention of 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 rate of money supply
Monetarism has played a significant role in shaping economic policy over the past forty years. Monetarists often support the ideas of a free market and a policy of non-interference by 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 constant rules of monetary circulation, rather than rely on strong-willed fiscal and monetary policies.
In principle, monetarists might advise resorting to monetary policy instruments to achieve the necessary regulation of the economy. But they decided to settle on the assumption that the private sector is quite stable and that instability in the economy is usually introduced by the government. Moreover, monetarists believe that money affects output only with a significant lag, the magnitude of which can vary, so the development of an effective stabilization policy sometimes takes a long time.
Thus, a key element of monetarist economic philosophy is the monetary rule: effective monetary policy should be used to maintain a constant rate of growth in the money supply under all economic conditions.
What is this approach based on? Monetarists believe that fixed growth rates of the money supply (3-5% per year) would eliminate the main source of instability in modern economy- unpredictable changes in monetary policy. If instead of the FRS some kind of computer program, which would always monitor the maintenance of fixed growth rates M, then the problems associated with fluctuations in the volume of the money supply would disappear. If the velocity of money was stable, nominal GDP would increase at a constant and constant rate. And if the money supply also increased at the same rate 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 it is a highly efficient mechanism. 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 effort finally put an end to our village life.
But what distinguishes money from other machines is that this machine is too capricious and when it breaks down it sends all other mechanisms into convulsions. The Great Depression is the most dramatic, but not the only example of this. Any inflation was a consequence of money creation, which was resorted to during the war to cover unsatisfied demand in addition to explicit taxes.
The first and most important lesson that history teaches, the lesson perhaps the most instructive, is that monetary policy can divert money from being the main source of economic trouble. This sounds like a warning to avoid making big mistakes, and to some extent it is. The Great Depression might not have happened, and if it had happened, 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 were at the disposal of the Federal Reserve System at that time.
Even if the recommendation not to make money the source of economic disruption were entirely negative, it would not do much harm. Unfortunately, it is not entirely negative. The monetary machine also failed when the central authorities did not have the power that is concentrated in the hands of the Federal Reserve System. In the history of the United States, the episode of 1907 and the banking panics of earlier periods are examples of how the money machine can break down on its own. Therefore, financial institutions are faced with a necessary and important task: to make such improvements to it that would minimize its occasional failures and allow them to extract the greatest benefit from it.
The second task of monetary policy as the basis of a stable economy is to keep the machine, to use Mill's analogy, well oiled. An economic system will function well when producers and consumers, employers and wage workers have full confidence that the average price level will behave in a predictable manner in the future: best of all, remaining stable. Given any conceivable institutional constraints, there is only very limited mobility of prices and wages. This degree of flexibility must be maintained to allow for the relative fluctuations in prices and wages that are required to accommodate progressive changes in technology and tastes. Governments should not strive to achieve some absolute price level that in itself carries no economic function. In earlier times, 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 can no longer be returned, and there are only a few countries left in the world that are ready to afford the luxury of the gold standard - there are good reasons to abandon it. Financial institutions actually resort to a kind of surrogate for the gold standard when they fix exchange rates, responding to fluctuations in the balance of payments solely by changing the volume of the money supply, without caring at all about the “sterilization” of surpluses and deficits and without resorting to exchange rate control, openly or covertly. currency or the introduction of tariffs and quotas. Again, although many central banks are talking about this possibility, few would actually want to pursue this course, and it is not innocuous reasons that make most refrain from such a step. The fact is that such a policy puts the country under the power not of an impersonal machine in the form of a gold standard, but of financial authorities that can act both deliberately and spontaneously.
IN modern world If monetary policy is entrusted with ensuring the stability of the economic foundation, its power should be used with the utmost caution.
And one last thing. Monetary policy can, to a certain extent, neutralize the strongest disturbances affecting the economic system from the outside. For example, if there is a natural long-term revival of the economy - this is how apologists of secular stagnation characterized the post-war development - monetary policy, in principle, can help maintain growth in the money supply at a level that cannot be achieved with other instruments. Or let's say when bloated federal budget threatens to result in unprecedented deficits, monetary policy can quell inflation fears by keeping money supply growth lower than some reasons would desire. This means a temporary increase in interest rates, which is likely to have a very painful impact on the budget now, but will enable the government to obtain the necessary loans to finance deficits, and this, in turn, will prevent the acceleration of inflation and, therefore, definitely promises both lower prices and lower discount rates. Finally, if the end of a war requires a country to shift resources to peaceful production, monetary policy can facilitate the transition by recommending an increase in the rate of money growth above that required for normal conditions, although experience is not encouraging because this can be taken too far.
monetarism money supply price
3.2 How monetary policy should be conducted
How should monetary policy be conducted to ensure that it actually achieves its objectives when it can?
The first recommendation is that financial authorities should monitor those parameters that they can control, rather than those that they cannot. If, as often happens, the authorities take as a direct criterion the value discount rate or the level of current unemployment, 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 off course. It's the same with the authorities. Among the various parameters that they are able to control, the most attractive as reference points are exchange rate, the price level specified by one or another index, and the total amount of money - cash plus demand deposits, or this amount increased by the amount of time deposits, or some even broader monetary aggregate.
Among the three named indicators, the price level is rightfully the most important. Other than that equal conditions, it truly represents the best alternative. The connection between the actions of financial authorities and the price level, and it undoubtedly always takes place, is more indirect than the connection of their policies with any monetary aggregate. In addition, the consequences of monetary actions on prices appear after a longer period of time than the reaction to a change in the quantity of money, and the time lag and the magnitude of the effect in both cases depend on the circumstances. As a result, it is impossible to accurately predict exactly what effect this or that government move 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 the policy itself into a source of disturbance, since errors in the choice of starting and stopping points are possible. Perhaps, with progress in our understanding of monetary phenomena, the situation will change, but today more roundabout way to the goal seems more reliable. Therefore: the volume of the money supply is the best direct criterion of monetary policy currently 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 monetary policy. In the past, financial authorities have proven their ability to move in the wrong direction. More often than not, however, they chose the right direction, but were either late or moved too quickly, which was their main mistake. For example, in early 1966, the US Federal Reserve began to pursue the correct policy of slowing monetary expansion, although this should have been done a year earlier. And having started to move in the right direction, it did it too quickly, making the sharpest 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 had to reverse course at the end of 1966, but it again missed the optimal point and not only did not return, but also exceeded the previous rate of growth of the money supply. And this episode is no exception - similar things happened in 1919-1920, 1937-1938, 1953-1954 and 1959-1960.
The reason for these overlaps is obvious - the time gap between the actions of financial authorities and the consequences of their actions in the economy. The authorities are trying to catch these consequences of the state of the economy today, but they appear only after six, or nine, or twelve, or even fifteen months. Therefore, they are forced to react too harshly to every jump up or down.
The rapid adaptation of society to a publicly announced and firmly pursued policy of constant growth of the money supply constitutes the main achievement of 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 in other countries. On the contrary, periods of sharp changes in the money supply were periods of large fluctuations in economic activity.
By strictly adhering to the adopted course, financial authorities are doing the best they can to maintain economic stability. If this is a course for 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 influence 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 of economic development. And this is the most that can be demanded from monetary policy at the current level of our knowledge. But this “more,” as is now clear to everyone and which is important in itself, is quite achievable.
3.3 Monetarist experiment
Monetarist views gained popularity in the late 1970s. In the US, many thought that Keynesian stabilization policies had failed by failing to control inflation. As inflation began to climb into double digits in 1979, many economists and policymakers began to believe that the only hope for controlling inflation lay in monetary policy.
In October 1979, the new chairman of the Federal Reserve System, Paul Volcker, announced that it was time to get rid of inflation. This event was later called the monetarist experiment. In a radical restructuring of the Fed's operations, it was decided to shift the focus from regulating interest rates to a policy of maintaining bank reserves and the supply of money along a predetermined growth trajectory.
The Fed's leadership 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, tight and credible monetary policy will help reduce inflation expectations, especially those embedded in labor agreements, and demonstrate the end of the period of high inflation. If expectations related to high level inflation, the economy will move into a phase of a relatively painless decline in the “core” inflation rate.
This experiment was highly successful in slowing economic growth and reducing inflation. As interest rates rose as a result of low money growth, interest rate-sensitive spending slowed. As a consequence, real GDP growth stalled between 1979 and 1982, and the unemployment rate rose from less than 6% to its peak of 10.5% at the end of 1982. The rate of inflation has fallen sharply. All doubts about the effectiveness of monetary policy disappeared. Money works. Money matters. But this does not mean that only money matters!
What about the monetarists' claim that tight and credible monetary policy should be regarded as a low-cost anti-inflationary strategy? Numerous studies of this issue over the past ten years show that tight monetary policy works, but the costs of its implementation are quite high. From the point of view of production and employment, the economic sacrifices of monetarist anti-inflationary policies were almost as great (per point of disinflation) as the costs incurred by implementing other methods of anti-inflationary policies. Money works, but does not create miracles. There are no free breakfasts on the monetarist menu.
3.4 Declining popularity of monetarism
Oddly enough, 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. Most significant change What happened during the monetarist experiment (and even after its end) was a 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 precisely after the recognition of the monetarist doctrine that the velocity of money circulation became extremely unstable. In fact, the M1 circulation rate changed more in 1982 than in the previous few decades (Figure 4). The high interest rates that established during this period gave rise to various innovations in the financial sector and an increase in the number of owners of checkable deposits that generate 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 expectations were placed too high on monetary policy during that period.
As the velocity of money became increasingly unstable, the Federal Reserve gradually abandoned its use as a guide for its monetary policy. By the early 1990s, it focused primarily on trends related to output, inflation, employment and unemployment, and used them as key indicators of the health 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 committee's adoption of certain short-term measures, the term “money velocity” does not appear at all.
However, none of these trends detracts from the importance of money as an instrument for carrying out certain macroeconomic policies. In essence, monetary policy is now a very important macroeconomic policy tool 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 tool 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 supply of money 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 the V value is clearly not constant (even due to the fact that it changes along with changes in interest rates), monetarists believe that its fluctuations are regular and predictable.
3. From the definition of the velocity of money we can derive the quantity theory of prices.
In the quantity theory of prices, P is considered to be almost strictly proportional to M. This view is quite 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 arise mainly from disturbances in the money supply.
5. Monetarism is usually associated with the “free market”, “policy of non-intervention by the state”. In an effort to avoid active government intervention in the economy, considering the private business sector to be internally stable, monetarists often propose setting a constant rate of growth of the money supply at approximately 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 monetarist experiment in 1979-1982. The experience has convinced the greatest 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, according to Lucas's criticism, the velocity of money may be quite unstable if the monetarist approach is put into 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, money circulation and credit”, Moscow, 1999
4. Usoskin V.M. “The Theory of Money”, Moscow, “Mysl”, 1976.
5. Friedman M. “If money could talk...”, Moscow, “Delo”, 1999.
6. Yadgarov Y.S. “History of economic doctrines”, Moscow, “Economy”, 1996.
7. Paul E. Samuelson, William D. Nordhaus “Economics”, Moscow, “William”, 2007.
8. McConnell Campbell, Brew Stanley "Economics", 2007.
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 is an economic theory alternative to Keynesianism, according to which the total volume of product and the price level change depending on changes in the supply of money; and, therefore, achieving non-inflationary economic growth requires control over the circulating money supply.
The term "monetarism" also has a second meaning. Often in economic literature they denote anti-inflationary policy state, which was tested in a number of industrialized countries of the world (USA, UK, etc.) in the 80s. XX century Some of its provisions brought tangible success in the fight against inflation processes. The anti-inflationary program provided for the establishment of high bank interest rates, the cessation of wage growth and even its reduction. For this purpose, it was proposed to maintain unemployment at a fairly high level.
Monetarism is one of the main trends of modern neoconservatism, which was formed along with supply theory in the 50-70s. XX century The term “monetarism” was introduced in 1968 by the American economist K. Brené in order to highlight the money supply as a key factor determining the economic situation. It has, however, long historical roots that go back to the 18th century, to the time of the classics - A. Smith, D. Ricardo, J.B. Say, D. Hume, and represents the doctrine of “neoclassical revival” [
Monetarism is one of the most influential trends in modern economics, belonging to the neoclassical direction. He examines the phenomena of economic life primarily from the perspective of processes occurring in the sphere of money circulation.
The founder of monetarism is the creator of the Chicago school, Nobel Prize winner in 1976, Milton Friedman. It was he who formulated most of the methodological principles on which a significant part of monetarists rely. The main principle is based on the relationship of the formal-logical method of scientific analysis with calculations made on the basis economic models. In this way, monetarists link the real state of affairs with theoretical conclusions.
The main feature of monetarism is that all the main problems of a market economy are considered and solved through issues of money circulation. Monetarists are strong supporters of the free market. They consider government regulation meaningless over a long period of time, since it unblocks the action of market regulators. In the short term, in their opinion, it gives only a temporary effect. Due to this circumstance, scientists of the Chicago school have developed a number of methodological principles and theoretical concepts that oppose the Keynesian concepts of state regulation of the economy
Monetarism is based on the theoretical position of a self-regulating economic system. The essence is in two theses: money is the main driving force of a market economy; The central bank can influence the money supply. It is proposed to maintain the growth rate of the money supply at the level of 3-5% per year. Otherwise, the mechanism of private entrepreneurship is disrupted and inflation increases. The impact on the economy comes down to maintaining constant growth rates of the money supply. In this regard, in many countries, targeting of the money supply (from the English target - goal) was introduced, which consisted in establishing targets - the lowest and highest limits of various monetary aggregates for the coming period (quarter, year, etc.). In the USA and Germany, targeting was introduced in the early 70s, Canada - in 1975, France and Great Britain - in 1978. In most countries, targeting has degenerated into a simple formality: the “forks” of the growth limits of the money supply are adjusted to the actual rate of its growth for the previous period, and the central bank does not bear responsibility for violation of these limits.
Monetarism, as its name suggests, emphasizes money and its fundamental equation is the equation of exchange: MV = PQ, where M is the supply of money; V - velocity of money circulation; P - price level; Q is the volume of services produced.
Basic principles of monetary theory:
- 1. The fundamental difference between nominal and real quantities of money.
- 2. A fundamental difference in the prospects opening up to an individual and society as a whole when the nominal amount of money changes.
These points form the core of monetary theory.
- 2.1 Another way of expressing the second principle is to distinguish between the equations: flow (the amount of spending is equal to the amount of receipts, or the volume of final services received is equal to the volume of services produced) and stock (the sum of individual cash reserves is equal to its total supply in society).
- 3. The decisive role of the aspirations of individual subjects, which is reflected by the difference between the concepts of ex ante and ex post. At the moment of receiving additional cash, the volume of expenses exceeds the expected volume of receipts (ex ante: expenses exceed receipts). Ex post: both quantities turn out to be equal. But attempts by individuals to spend more than they receive, which are doomed to failure in advance, lead to a general increase in costs and receipts.
- 4. The difference between the final state and the process of transition to this state demonstrates the difference between long-term statics and short-term dynamics.
- 5. The meaning of the concept of “real stock of money” and its role in the process of transition from one stationary state of equilibrium to another.
The monetarist concept is based on the quantity theory of money, although its interpretation is somewhat different from the traditional one.
The quantity theory says that there is a direct connection between the quantity of money and the price level, that prices are determined by the amount of money in circulation, and the purchasing power of money is determined by the price level. As the money supply increases, prices rise. And vice versa, the money supply decreases - prices decrease. Other things being equal, commodity prices change in proportion to the quantity of money.
Monetarists proceed from the fact that the main function of money is to serve as a financial basis and the most important stimulator of economic development. Regulation of the money supply through the banking system affects the distribution of resources between industries, promotes technical progress, and maintains economic activity.
Money instruments should be used carefully. If there is a relatively small increase in the amount of money in circulation and a corresponding increase in prices, consistent with the rate of economic growth, then the necessary preconditions are created for equilibrium between the monetary and commodity sectors. If prices rise quickly, uncontrolled inflation sets in. The purchasing power of money decreases. The need for them is increasing, because the volume of trade turnover is increasing (in nominal terms). a lack of Money may lead to a crisis in payments and settlements.
According to monetarists, inflation is a purely monetary phenomenon. According to Friedman, "The central point is that inflation is always and everywhere a monetary phenomenon." The cause of inflation is an excess of money supply, “a lot of money - few goods.” Changes in the demand for money usually arise as a reaction to ongoing processes, to the market situation, and changes in the sphere of economic policy.
Monetarists distinguish between two types of inflation: expected and unexpected. With expected inflation, the prerequisites are created for achieving equilibrium in the markets for goods and services: the rate of price growth corresponds to people's expectations and calculations. The state, in one form or another, informs about the expected price increase, say, 3% per year, and producers, sellers, and buyers adapt to this.
It's a different matter if the inflation rate goes beyond what was expected. A sharp rise in prices is accompanied by various disruptions and deviations from the usual rhythm of economic activity.
M. Friedman expressed his negative attitude towards price regulation and curbing price growth. He argued that price controls and wages unable to eliminate inflation.
Monetary policy should be aimed at achieving a match between the demand for money and its supply. The growth of money supply (the percentage of money growth) must be such as to ensure price stability. Friedman proceeds from the fact that it is very difficult to maneuver with various indicators of money growth.
Central bank forecasts are often wrong. It is difficult, or rather impossible, to find out exactly what factors influence economic development. Decisions made, as a rule, are delayed.
“In the financial arena, in most cases the wrong decision is likely to be made because decision makers look only at a limited area and do not take into account the totality of the consequences of the policy as a whole,” Friedman wrote. In his opinion, the central bank should abandon the opportunistic policy of short-term regulation and move to a policy of long-term impact on the economy, a gradual increase in the money supply.
The money supply affects not real, but nominal GNP. Monetary factors “work” on price and value indicators. Therefore, under the influence of the quantitative growth of money, prices rise.
Encyclopedic YouTube
1 / 5
✪ Lecture 3.6 | Friedman and the monetarists | Yulia Vymyatnina | Lectorium
✪ Keynesian cross
✪ Labor economics. Labor market models.
✪ School of Organizational Behavior. Victor Vroom's Expectancy Theory
✪ Freedom of choice The power of the market Milton Friedman part 1/10 (1980) Russian subtitles
Subtitles
Predecessors of monetarism
The understanding that price changes depend on the volume of money supply has come to economic theory since ancient times. So, back in the 3rd century, the famous ancient Roman lawyer Julius Paul argued about this. Later in 1752, the English philosopher D. Hume studied the connection between the volume of money and inflation in his “Essay on Money.” 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 wrote his “Principles of Political Economy” in general view a quantitative theory of money has already been developed. To Hume's definition, Mill added a clarification about the need for constancy in 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 product supply can also increase in comparable volumes.
Within the framework of the neoclassical school, I. Fisher in 1911 gave the quantity theory of money a formal form in his famous equation of exchange:
M V = P Q (\displaystyle MV=PQ),The modification of this theory by the Cambridge school (Fisher) 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 consumer choice. At the same time, Fisher, unlike A. Marshall and A. Pigou, excludes the possibility of the interest rate influencing the demand for money.
Despite scientific recognition, the quantity theory of money did not go beyond academic circles. 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 obtained practical application. 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 higher prices, and short-term fluctuations in GDP are related to the money supply. His works 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, co-authored with D. Meiselman, “Relative stability of the velocity of money circulation and the investment multiplier in the United States for 1897-1958,” was published, which caused 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 cash income depended solely on fluctuations in the money supply. Immediately after the publication of the article, their point of view was severely criticized by many economists. At the same time, the main complaint was the weakness of the mathematical apparatus used in this work. Thus, A. Blinder and R. Solow later admitted that this approach is “too primitive for representing 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 of economic research - the theory of rational expectations. Under its influence, Keynesians had to reconsider their views on the justification of active policy.
Key Points
Demand for money and supply of money
By suggesting that the demand for money is similar to the demand for other assets, Friedman was the first to apply 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 demand function for money is stable. At the same time, the money supply is unstable, as it depends on unpredictable government actions. Monetarists argue that in the long run real GDP will stop growing, so changes in the money supply will have no effect on it, affecting only the inflation rate. This principle became the basis for monetarist economic policy and was called neutrality of money .
Monetary rule
In connection with the principle of neutrality of money, monetarists advocated legislative enshrinement monetarist rule, which is 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 countercyclical monetary policy. According to monetarists, a constantly increasing money supply will support expanding demand without causing increased inflation.
Despite the logic of this statement, it immediately became the object of sharp criticism from Keynesians. They argued that it would be 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, destabilizing the entire economy.
Monetarist concept of inflation
Natural rate of unemployment
Natural unemployment refers to voluntary unemployment, in which the labor market is in an equilibrium state. 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 level of unemployment that keeps the real wage and price level stable (in the absence of growth in labor productivity).
According to monetarists, deviations of unemployment from its equilibrium level can only occur in the short term. If the employment level 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, it is concluded that employment policy should be aimed at smoothing fluctuations in the unemployment rate from its natural norm. At the same time, it is proposed to use monetary policy instruments to balance the labor market:483.
Permanent Income Hypothesis
In his 1957 paper, The Theory of the Consumption Function, Friedman explained consumer behavior in permanent income hypothesis. In this hypothesis, Friedman states 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 average income, and temporary income is equivalent to a random deviation from average income. According to Friedman, consumption depends on permanent income, since consumers smooth out fluctuations in temporary income with savings and borrowed funds. The permanent income hypothesis states that consumption is proportional to permanent 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
- The regulatory role of the state in the economy should be limited to control over money circulation;
- A market economy is a self-regulating system. Disproportions and other negative manifestations are associated with the excessive presence of the state in the economy;
- The money supply affects the amount of spending by consumers and firms. An increase in the supply of money leads to an increase in production, and after full capacity utilization - to an increase in prices and inflation;
- Inflation must be suppressed by any means, including by cutting social programs;
- When choosing the growth rate of money, it is necessary to be guided by the rules of “mechanical” growth of the money supply, which would reflect two factors: the level of expected inflation; rate of growth of the social product.
- Self-regulation of the market economy. Monetarists believe that a market economy, due to internal tendencies, strives for stability and self-adjustment. If disproportions and violations occur, 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 a disruption of the normal course of economic development.
- The number of government regulators is reduced to a minimum. The role of tax and budget regulation is excluded or reduced.
- The main regulator influencing economic life is “money impulses” - regular money emission. Monetarists point to the relationship between changes in the quantity of money and the cyclical development of the economy. This idea was substantiated in the book “Monetary History of the United States, 1867-1960” by American economists Milton Friedman and Anna Schwartz, published in 1963. Based on the analysis of actual data, it was concluded that the subsequent onset of one or another phase of the business cycle depends on the growth rate of the money supply. In particular, lack of money is the main cause of depression. Based on this, monetarists believe that the state must ensure constant money emission, the value of which will correspond to the rate of growth of the social product.
- Refusal of short-term monetary policy. Since changes in the money supply do not immediately affect the economy, but with some delay (lag), the short-term methods of economic regulation proposed by Keynes should be replaced with long-term policies 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 upward trend (which is determined, in particular, by the propensity to save), and in order to ensure correspondence between the demand for money and its supply, it is necessary to pursue a gradual increase (at a certain rate) of money in circulation. Government regulation should be limited to control over monetary circulation.
Monetarism in practice
Monetary targeting
The first stage of the monetarism policy of Central Banks was the inclusion of monetary aggregates in their econometric models. Already in 1966, the US Federal Reserve began studying 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. After the US, Germany, France, Italy, Spain and the UK announced targets for money supply growth. In 1979 European countries came to an agreement on the creation of the European Monetary System, within the framework of which they pledged to maintain the exchange rates of their national currencies within certain limits. This led to the fact that largest countries Europe targeted both the exchange rate and money supply. Small countries with open economies such as Belgium, Luxembourg, Ireland and Denmark continued to target only exchange rate. Yet in 1975, most developing countries continued to maintain some form of fixed exchange rate. However, starting from the late 1980s, monetary targeting began to give way to inflation targeting. And by the mid-2000s, most developed countries switched to a policy of defining an inflation target rather than monetary aggregates.
see also
Notes
- Moiseev S. R. The rise and fall of monetarism (Russian) // Questions of Economics. - 2002. - No. 9. - pp. 92-104.
- M. Blaug. Economic thought in retrospect. - M.: Delo, 1996. - P. 181. - 687 p. - ISBN 5-86461-151-4.
- Sazhina M. A., Chibrikov G. G. Economic theory. - 2nd edition, revised and expanded. - M.: Norma, 2007. - 672 p. - ISBN 978-5-468-00026-7.
- Mishkin F. Economic theory of money, banking and financial markets. - M.: Aspect Press, 1999. - P. 548-549. - 820 s. - ISBN 5-7567-0235-0.
- Mishkin F. Economic theory of money, banking and financial markets. - M.: Aspect Press, 1999. - P. 551. - 820 p. - ISBN 5-7567-0235-0.
- 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) // Ekovest. - 2002. - No. 4. - P. 520-557.
- Mishkin F. Economic theory of money, banking and financial markets. - M.: Aspect Press, 1999. - P. 563. - 820 p. - ISBN 5-7567-0235-0.
- S. N. Ivashkovsky. Macroeconomics: Textbook. - 2nd edition, corrected and expanded. - M.: Delo, 2002. - P. 158-159. - 472 s. - ISBN 5-7749-0178-5.
- K. R. McConnell, S. L. Brew. Economics: principles, problems and policies. - translation from the 13th English edition. - M.: INFRA-M, 1999. - P. 353. - 974 p. - ISBN 5-16-000001-1.