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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.

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Paper provided by Levy Economics Institute, The in its series Economics Working Paper Archive with number 347.

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Date of creation: Jun 2002
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Handle: RePEc:lev:wrkpap:347

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Leeson, Robert, 1997. "The Trade-off Interpretation of Phillips's Dynamic Stabilization Exercise," Economica, London School of Economics and Political Science, vol. 64(253), pages 155-71, February. [Downloadable!] (restricted)
  2. Taylor, John B., 2001. "An Interview With Milton Friedman," Macroeconomic Dynamics, Cambridge University Press, vol. 5(01), pages 101-131, February. [Downloadable!]
  3. Nobay, A Robert & Johnson, Harry G, 1977. "Monetarism: A Historic-Theoretic Perspective," Journal of Economic Literature, American Economic Association, vol. 15(2), pages 470-85, June. [Downloadable!] (restricted)
  4. repec:cup:macdyn:v:5:y:2001:i:1:p:101-31 is not listed on IDEAS
  5. Tavlas, George S, 1997. "Chicago, Harvard, and the Doctrinal Foundations of Monetary Economics," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 153-77, February.
  6. Bibow, Jorg, 1998. "On Keynesian Theories of Liquidity Preference," The Manchester School of Economic & Social Studies, Blackwell Publishing, vol. 66(2), pages 238-73, March.
  7. repec:cup:jhisec:v:20:y:1998:i:01:p:71-82_00 is not listed on IDEAS
  8. Dimand, Robert W, 1991. "Keynes, Kalecki, Ricardian Equivalence, and the Real Balance Effect," Bulletin of Economic Research, Blackwell Publishing, vol. 43(3), pages 289-92, July.
  9. Greenwald, Bruce & Stiglitz, Joseph E, 1993. "New and Old Keynesians," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 23-44, Winter. [Downloadable!] (restricted)
  10. Goodhart, Charles A E, 1994. "What Should Central Banks Do? What Should Be Their Macroeconomic Objectives and Operations?," Economic Journal, Royal Economic Society, vol. 104(427), pages 1424-36, November. [Downloadable!] (restricted)
  11. Tobin, James, 1970. "Money and Income: Post Hoc Ergo Propter Hoc?," The Quarterly Journal of Economics, MIT Press, vol. 84(2), pages 301-17, May. [Downloadable!] (restricted)
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  12. Modigliani, Franco, 1977. "The Monetarist Controversy or, Should We Forsake Stabilization Policies?," American Economic Review, American Economic Association, vol. 67(2), pages 1-19, March.
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  13. Johnson, Harry G, 1971. "The Keynesian Revolution and the Monetarist Counter-Revolution," American Economic Review, American Economic Association, vol. 61(2), pages 1-14, May.
  14. J. Bradford De Long, 2000. "The Triumph of Monetarism?," Journal of Economic Perspectives, American Economic Association, vol. 14(1), pages 83-94, Winter. [Downloadable!] (restricted)
  15. Hoover, Kevin D, 1984. "Two Types of Monetarism," Journal of Economic Literature, American Economic Association, vol. 22(1), pages 58-76, March. [Downloadable!] (restricted)
  16. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June. [Downloadable!] (restricted)
  17. Jörg Bibow, 2001. "Reflections on the Current Fashion For Central Bank Independence," Macroeconomics 0108004, EconWPA. [Downloadable!]
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  1. Joerg Bibow, 2005. "Liquidity Preference Theory Revisited: To Ditch or to Build on It?," Economics Working Paper Archive wp_427, Levy Economics Institute, The. [Downloadable!]
  2. Joerg Bibow, 2005. "Liquidity Preference Theory Revisited—To Ditch or to Build on It?," Method and Hist of Econ Thought 0508003, EconWPA. [Downloadable!]
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