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Controversies in Monetary Economics

Revised Edition

John Smithin

This influential volume, which has been revised and updated for the twenty-first century, includes both new material and more detailed expositions of existing arguments. Although so-called ‘real’ theories of business cycles and growth are prevalent in contemporary mainstream economics, Controversies in Monetary Economics suggests that those economists who have instinctively focused on monetary factors in explaining macroeconomic behaviour are more genuinely ‘realistic’. The author combines an explanation of past and present monetary controversy with practical proposals for the conduct of monetary policy in the contemporary global economy. Several alternative approaches are discussed, ranging from the traditional quantity theory to post Keynesian theories of endogenous money.
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Chapter 3: Monetarism and the Quantity Theory of Money

John Smithin


INTRODUCTION By common consent, Milton Friedman was the most influential monetary economist of the twentieth century after Keynes, a view affirmed even by economists usually regarded as unsympathetic to his point of view, such as Galbraith (1987) and Heilbroner (1990). It was Friedman and his collaborators who were primarily responsible for the remarkable revival of the ancient quantity theory of money in the second half of the twentieth century, under its modern name of monetarism. Other noted economists were also influential in the development of monetarist ideas, but this chapter will concentrate primarily on the work of Friedman, whose name is undoubtedly that most firmly associated with these developments (Cagan, 1989). The discussion serves the twin purposes not only of describing a relatively recent chapter in the history of economic thought, which is important in its own right, but also, more generally, of describing the quantity theory itself through the lens of perhaps its most sophisticated version. The quantity theory, dating back at least to the writings of Hume in the eighteenth century, and even earlier, had historically been one of the most influential methods of approaching the important questions of monetary theory and policy. However, by the time of Friedman’s major contributions it was in abeyance in the aftermath of the so-called ‘Keynesian revolution’. To restore it to the top of the economic agenda was therefore a notable achievement on Friedman’s part. Nonetheless, as stressed by Laidler (1990), towards the end of the twentieth century...

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