Some Observations on Monetarist Analysis

Abstract

In this paper, I have tried to sketch the main outlines of monetarist thought. It has developed that the version of Keynesianism against which the monetarists pit their model is indeed an out-of-date, inadequate, and - to use Professor Johnson’s term - a “vulgar” version of current post- Keynesian thinking. When incorrect monetarists assertions about the nature of modern Keynesianism are corrected, it is seen that the two models are indeed very similar. Instead of differing in that one version (the Keynesian) employs a theoretically unsatisfactory deus ex machina assumption while the other has implicit in it a large amount of unspecified economic behavior, it turns out that the two models differ chiefly in the realism and relevance of their assumptions, with the typical Keynesian assumption of money wage inflexibility appearing much more appropriate for short-run (1. e., stabilization policy) use, and the typical monetarist assumption of wage and price flexibility, or of the rate of interest being determined by considerations other than current aggregate demand and supply, being more useful in the analysis of secular change. It further appears that monetarist fascination with the money stock ıs unwarranted by monetarist logic, which seems to me to place great em phasis on portfolio disequilibrium as a potent driving force in the economy. It does not follow from this view, as a matter of logic, that observed changes in the money stock have any particular significance as a causative force. Further assumptions about elasticities, price flexibility, etc., are required to give monetary changes pride of place, as I have tried to show in this essay. On the positive side, monetarists have contributed to the development of macroeconomic thought by demonstrating that the links relied on by most Keynesians to connect the real and monetary sectors probably are not those which Keynes had in mind, and overlook completely the ımportant substitution and wealth effects which are the concomitants of portfolio adjustment. The monetarists have also called our attention to the distinction, apparently first made by Irving Fisher many years ago, between market and real interest rates, and therefore to the potentially important role of price expectations in dynamic macroeconomics. These phenomena are extraordinarily difficult to capture in empirical models, but work is proceeding along these lines. It is to be hoped that during the next few years, they will be made standard features of Keynesian theoretical and empirical models, and that dependable evidence will be provided so that the remaining questions which divide us can be settled; mainly, whether, as Brunner phrases it, we can reject the possibility that “... detailed allocative patterns significantly influence the aggregative behavior of the economic process ...” and proceed on the basis that “... aggregative forces and allocative forces are approximately separated”” 8. "This point of view, which dismisses most of the detail presently being built in to large econometric models such as the Federal Reserve Board-MIT model as being irrelevant and even misleading, appears to underlie most of the econometric work of the monetarists. It seems to the present writer to be a restatement, in general terms, of the old quantitytheory propositions that the demand-for-money function is extremely stable in the sense of having very few arguments (and, in particular, being responsive to few if any yields on other assets). If the demand for money is determined only by income (or wealth), for instance, then, for aggregative purposes, we need not know anything about the determinants of prices (yields) and quantities demanded and supplied in various financial markets. But, as Brunner points out, this ıs really an empirical question, and is outside of the scope of the present essay