Abstract

The Debate About Monetarist Policy Recommendations

The dispute between Keynesians and monetarists about monetary policy has failed to focus on a central issue, the Keynesian’s political assumption that the central bank can be trusted to operate efficiently and in the public interest. This underlies disagreements about the use of only a single target variable, the use of the monetary growth-rate as that variable, and the desirability of a stable monetary growth rate. If one grants the Keynesian political assumption, then Keynesian policy recommendations are highly plausible, if one reject it, then the monetarist ones are. While monetarists have repeatedly stated their distrust of the central bank, Keynesians have ignored this part of the monetarist case. This would be justified only if the Keynesian political assumption were obviously correct. But this is not the case, due to political pressures, the central bank’s self-interest and the potential for X-inefficiency. Hence, more effort should be devoted to tests of the political assumption.