Monetarist — Meaning, Overview, and Examples

What is a monetarist?

A monetarist is an economist or policymaker who believes that the money supply (currency, bank deposits, and credit) is the primary driver of economic activity and prices. Monetarists argue that controlling the growth of the money supply is the most direct and effective way to manage inflation and, by extension, the overall performance of the economy.

Key takeaways

• Monetarists prioritize the money supply as the main tool for regulating inflation and economic output.
• The core monetarist relationship is often expressed as MV = PY (money supply × velocity = price level × real output).
• Prominent figures associated with monetarism include Milton Friedman; its ideas influenced policymakers such as Paul Volcker, Alan Greenspan, and Margaret Thatcher.
• Monetarist policies aim for steady, predictable growth in the money supply, but practical implementation and assumptions (notably stable velocity) have been contested.

Core idea and the equation

Monetarism is summarized by the equation MV = PY:
* M = money supply
V = velocity of money (how quickly money circulates)
P = price level
* Y = real output (quantity of goods and services)

Monetarists typically assume velocity is relatively stable, so changes in M translate predictably into changes in nominal spending (PY). This assumption underpins the policy prescription that a steady, controlled growth in money supply will support growth without triggering inflation.

Historical context and impact

Milton Friedman and Anna J. Schwartz published a seminal monetarist analysis in A Monetary History of the United States, 1867–1960, arguing that mismanagement of the money supply deepened the Great Depression. Monetarism gained influence in the 1970s when the prevailing Keynesian framework struggled to explain stagflation (simultaneous high inflation and unemployment). Monetarist thinking helped justify tighter monetary policy to break inflationary expectations.

A key real-world application came under Federal Reserve Chair Paul Volcker (1979–1987), whose aggressive tightening of monetary policy prioritized fighting inflation—even at the cost of a sharp short-term recession—which many see as a successful demonstration of monetarist principles.

Policy implications and examples

• Targeting monetary aggregates: Monetarists favor rules or targets for money supply growth rather than discretionary fiscal stimulus.
• Opposition to the gold standard: Monetarists generally oppose strict commodity-based money (like a gold standard) because a fixed gold supply can constrain the ability to manage money supply in line with economic needs.
• Political adoption: Elements of monetarism influenced policy in the late 20th century in the U.S. and U.K., including inflation-targeting and tighter control of monetary expansion.

Criticisms and limitations

• Velocity is not perfectly stable. Since the 1980s, changes in financial innovation and payment systems have made V more variable, weakening the predictability of MV = PY.
• Controlling monetary aggregates precisely has proven difficult in practice; many central banks shifted toward interest-rate targeting and inflation-targeting frameworks.
• Monetarism tends to downplay fiscal policy and other structural factors affecting demand and supply.

Conclusion

Monetarism elevated the role of the money supply in macroeconomic theory and policy. Its core insight—that uncontrolled money growth fuels inflation—shaped late-20th-century monetary policy and continues to influence debates about how central banks should stabilize prices and support growth. At the same time, practical and theoretical challenges, especially the instability of money velocity and implementation difficulties, have limited strict monetarist prescriptions.

Further reading

• Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1867–1960.