4 - Monetarist inflation theory

Summary

The so-called monetarist debate has provided a critical analysis of the foundations of macroeconomics. The discussion reached a peak at the beginning of the 1970s in Milton Friedman's two articles “A Theoretical Framework for Monetary Analysis” (1970a) and “A Monetary Theory of Nominal Income” (1971) as well as in the theoretical debate surrounding them. In addition, the writings of K. Brunner (1970), K. Brunner and A.H. Meltzer (1976), A. Meltzer (1977), H.G. Johnson (1972a), D.E.W. Laidler (1975a, 1976, 1981), and M.J. Parkin (1975) have significantly contributed to the formulation and popularization of monetarism as a macroeconomic theory. In these monetarist works the explanation of inflation has played a central role. Although these authors applied different theoretical approaches, three hypotheses continually reappear in their works:

1. a. Inflation is in essence a monetary phenomenon.

2. b. Keynesian theory, which monetarists equate with a simple Phillips curve without adjustment for expectations, cannot explain the problem of inflation, especially the acceleration of inflation.

3. c. The rate of growth and the acceleration of the money supply explain the rate of inflation and its acceleration, respectively.

“Monetarism” (an expression Karl Brunner coined) contends to be more than just a theory of inflation, however. It can be conceived as an attempt to establish an alternative theoretical macroeconomic paradigm to the Keynesian view.