Abstract

The Structure of Monetarism (II)

This paper continues the discussion“ of monetarism by taking up six monetarist policy propositions. They are: (1) the use of a reserve measure as an indicator of monetary policy, (2) the use of the money stock as the proper target for monetary policy, (3) belief in a stable money growth rate rule, (4) rejection of an inflation-unemployment trade-off, (5) great concern about inflation, and (6) dislike of government intervention. The interrelations of these propositions and their relations to the six propositions taken up in Part I of this paper are discussed. Although at least five of them are clearly connected with other monetarist propositions, the connection is again such that one can accept some, without accepting the others. It is argued that use of a reserve measure as an indicator of monetary policy has only a weak connection with all the other monetarist propositions. However, for the other propositions the interconnections are much closer. To give some examples, the use of the money stock as a target for monetary policy is connected to the quantity theory, since the quantity theory centers on the money stock, and also implies that the money stock can be measured properly, something that is needed if it is to be used as a target. Similarly, the stable money growth rate is connected to the quantity theory by the belief that the demand for money is stable, and it is connected to the money stock target since it is a specification of that target. The rejection of the inflation-unemployment trade-off fits well with the quantity theory because, if the Phillips-curve is in real terms, prices and the stock of money move proportionately. Numerous other connections between these propositions are traced. The monetarist’s opposition to government interference fits well with most other monetarist propositions. But it would be misleading to consider this to be the basis of monetarism. Instead, a preference for simplicity, and skepticism about our knowledge seem more basic.