The contribution of monetarism to economic analysis and policy,
by Jean-Pierre Laffargue.
The monetarist theory was first developed in the United States, a country where economic conditions do not depend to any large extent on those prevailing in the rest of the world, and its analysis was worked out in the theoretical context of a closed economy. Its approach is basically inductive. Its empirical studies lead to the conclusion that fluctuations in the supply of money are an essential cause of alterations in economic activity, and that the increase in the rate of monetary expansion has a positive but brief effect on the volume of production and employment, which subsequently is converted into a simple rise in inflation. A simple theoretical interpretation of the results is possible by means of a function of money demand, stable over a long period, and a Phillips equation. Finally, the monetarist theory concludes that the role of economic policy is to watch and control the trend of the quantity of money, or even to maintain its increase at a constant rate, while refusing to accord too much importance to the fluctuations of interest rates. The United States has given us, since 1979, an experience in monetarism which provides a wealth of information.
Many economists have questioned the validity of this monetarist theory (developed by Friedman) for economies which are extremely open to external influences. In fixed exchanges, all agree that on a long-term basis government authorities of a small country have no control over its money supply (in the absence of devaluation). Certain monetarists claim that this is also true on a very short-term basis, but this opinion seems to be in contradiction with results of empirical studies. For a small country, the validity of Friedman's monetarism would appear to be somewhat diminished, but to a large extent it would remain valid. In flexible exchanges, almost all economists recognize the fact that government authorities of such a country can control its money supply. Certain monetarists have attempted to explain the fluctuations in the rates of conversion between two currencies in terms of changes in their respective supplies. The empirical verifications have, however, shown that this explanation was insufficient and, since then, it has merged with several other theories, thereby losing its specific identity. These analyses are, this time, illustrated by the British experience since 1949.
The contribution of monetarism to economic analysis and policy, by Jean-Pierre Laffargue. The monetarist theory was first developed in the United States, a country where economic conditions do not depend to any large extent on those prevailing in the rest of the world, and its analysis was worked out in the theoretical context of a closed economy. Its approach is basically inductive. Its empirical studies lead to the conclusion that fluctuations in the supply of money are an essential cause of alterations in economic activity, and that the increase in the rate of monetary expansion has a positive but brief effect on the volume of production and employment, which subsequently is converted into a simple rise in inflation. A simple theoretical interpretation of the results is possible by means of a function of money demand, stable over a long period, and a Phillips equation. Finally, the monetarist theory concludes that the role of economic policy is to watch and control the trend of the quantity of money, or even to maintain its increase at a constant rate, while refusing to accord too much importance to the fluctuations of interest rates. The United States has given us, since 1979, an experience in monetarism which provides a wealth of information. Many economists have questioned the validity of this monetarist theory (developed by Friedman) for economies which are extremely open to external influences. In fixed exchanges, all agree that on a long-term basis government authorities of a small country have no control over its money supply (in the absence of devaluation). Certain monetarists claim that this is also true on a very short-term basis, but this opinion seems to be in contradiction with results of empirical studies. For a small country, the validity of Friedman's monetarism would appear to be somewhat diminished, but to a large extent it would remain valid. In flexible exchanges, almost all economists recognize the fact that government authorities of such a country can control its money supply. Certain monetarists have attempted to explain the fluctuations in the rates of conversion between two currencies in terms of changes in their respective supplies. The empirical verifications have, however, shown that this explanation was insufficient and, since then, it has merged with several other theories, thereby losing its specific identity. These analyses are, this time, illustrated by the British experience since 1949.