Monetarism-A View from a Central Bank

Monetarism, and particularly monetarism as a guide to monetary policy, is a controversial issue. Some economists, to quote Lord Kaldor (1981) regard ‘monetarism as a terrible curse, as a visitation of evil spirits’, For others it is the answer to the current economic malaise in general and inflation in particular. Both monetarists and Keynesians are in full agreement on the ultimate goal of economic policy — full employment, economic growth and stable prices; they disagree, however, on the role of monetary policy in achieving these objectives. Monetarists argue that monetary policy should primarily be used to control inflation. In their view, central bankers should abstain from fine-tuning the economy. For Keynesians, on the other hand, an activist mix of monetary and fiscal policy is necessary to achieve stable economic growth. The controversy over the role of monetary policy is largely the reflection of different opinions about the working of economies, although the two schools of thought are separated by a continuous spectrum of opinions rather than a sharp dividing line. Starting at one extreme, let us say the left, we first meet the ‘neo-Keynesians’ who deny the existence of a unique Walrasian equilibrium.1