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What has Happened to Monetarism? An Investigation into the Keynesian Roots of Milton Friedman's Monetary Thought and Its Apparent Monetarist Legacies

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  • Jorg Bibow

Abstract

It is widely perceived that today's conventional monetary wisdom, and the common practice of monetary policy based thereupon, is essentially "monetarist" by nature, if not by name. One objective of this paper is to assess whether monetarism has had a lasting effect on the theory and practice of monetary policy; another is to scrutinize the key dividing lines between Milton Friedman's monetary thought and that of John Maynard Keynes. Among the paper's main theoretical findings are that the key issue is the theory of interest, which is at the root of differences in approach to money demand and liquidity preference. Similarities are more pronounced with respect to the supply of money and monetary policy control issues. However, while Keynes favored a stabilized wage unit combined with a flexible central bank to steer interest rates and aggregate demand, Friedman advocated a stabilized central bank combined with a free interest rate and employment determination in financial and labor markets, respectively. Additional differences arise at the practical and empirical levels: the dynamics of adjustment processes and expectation formation on the one hand, and the relative efficiency and riskiness of market-driven versus government-guided adjustments on the other. The puzzling fact is that, despite today's dominant market-enthusiast ideology, Friedman's idea of delegation--not to independent central bankers, but to the markets--enjoys remarkably little popularity.

Suggested Citation

  • Jorg Bibow, 2002. "What has Happened to Monetarism? An Investigation into the Keynesian Roots of Milton Friedman's Monetary Thought and Its Apparent Monetarist Legacies," Economics Working Paper Archive wp_347, Levy Economics Institute.
    • Handle: RePEc:lev:wrkpap:wp_347
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    1. Milton Friedman, 1961. "The Lag in Effect of Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 69(5), pages 447-447.
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    1. Jorg Bibow, 2009. "On the origin and rise of central bank independence in West Germany," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 16(1), pages 155-190.
    2. Jörg Bibow, 2004. "Investigating the Intellectual Origins of Euroland’s Macroeconomic Policy Regime: Central Banking Institutions and Traditions in West Germany After the War," Method and Hist of Econ Thought 0405005, University Library of Munich, Germany.
    3. Joerg Bibow, 2005. "Liquidity Preference Theory Revisited—To Ditch or to Build on It?," Method and Hist of Econ Thought 0508003, University Library of Munich, Germany.
    4. Jorg Bibow, 2004. "Assessing the ECB's Performance since the Global Slowdown: A Structural Policy Bias Coming Home to Roost?," Economics Working Paper Archive wp_409, Levy Economics Institute.
    5. Muhammad Azmat Hayat & Huma Ghulam & Maryam Batool & Muhammad Zahid Naeem & Abdullah Ejaz & Cristi Spulbar & Ramona Birau, 2021. "Investigating the Causal Linkages among Inflation, Interest Rate, and Economic Growth in Pakistan under the Influence of COVID-19 Pandemic: A Wavelet Transformation Approach," JRFM, MDPI, vol. 14(6), pages 1-22, June.
    6. Jörg Bibow, 2006. "Europe's Quest for Monetary Stability. Central Banking Gone Astray," International Journal of Political Economy, Taylor & Francis Journals, vol. 35(1), pages 24-43.

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