Monetarism and Australia

810 Words2 Pages

Monetarism is one of the economic schools of thought, which states that the money supply (the total amount of money in an economy) is the chief determinant on the demand-side of short-run economic activity. Monetarism was largely spread by the leading monetarism exponent, Milton Friedman who had created a macroeconomic theory that money supply should remain steady in order for the economy to grow. Monetarism is largely different from Keynesian economic school of thought in which they state that the government is the chief determinant. Although both schools of thoughts have their strength and weaknesses, this paper will focus largely on monetarism. Is monetarism a valid economic theory? In other words, how well does Monetarism predict the economic movements particularly by the money supply? But before finding and plotting out answers, the monetary theory must be well defined.
The origin of monetarism dates back to 1945 when an American economist Clark Warburton was first credited for making the first solid monetarist interpretation of the business cycle. During this period however, monetarism was not well-known throughout the economy largely because economies did not severely experienced any major inflations as they remained stable and Keynesian economics were working up until the 1960s. However in the 1970s, economies around the world experienced high inflation and hyperinflations due to economic crises, oil shocks, slow growth, and high unemployment. Governments all over the world experienced high debt and stagflation, which is a state of high inflation and high unemployment. The Keynesian theory, which advocated increase in government spending, did not seem to have any effect during this period since spending more simply increa...

... middle of paper ...

...uccess.
The policy that the Australian government issued was simple: controlling the money supply. The Reserve Bank Board controls the money supply, which is in charge of the monetary policy. From day to day, the Board issues a target cash rate (rate charged on overnight loans between financial intermediaries) to maintain conditions in the market. This directly ties into monetarism since the theory focuses on money supply. However, the monetarism theory does not adequately explain why the policy was successful. This is because according to long-term monetarism, the influence of money supply is only on the price level. In the Australian monetary policy, the money supply in the long-term is not controlled by price level, but through cash rates. Thus monetarism does not explain why the Australian inflation has been decreasing and kept mostly steady for 20 years.

Open Document