Definition
Monetarism
Monetarism, associated with Milton Friedman, holds that the money supply is the primary driver of inflation and economic activity, and that steady money growth is the best policy.
Monetarists argue 'inflation is always and everywhere a monetary phenomenon', so controlling money supply growth is the key to price stability, rather than active fiscal fine-tuning. They favour rules over discretion.
This school shaped modern central banking and inflation targeting, including the RBI's framework. The Keynesian-monetarist debate is whether to manage the economy through government spending (Keynes) or through steady monetary control (Friedman).
Related terms
- Keynesian EconomicsKeynesian economics argues that aggregate demand drives output and employment, and that governments should use fiscal and monetary policy to stabilise the economy in downturns.
- Quantity Theory of MoneyThe quantity theory of money states that the general price level is proportional to the money supply, captured in the equation MV = PT (money times velocity equals price times transactions).
- Velocity of MoneyThe velocity of money is how many times a unit of currency is spent on goods and services in a given period; higher velocity means money circulates faster through the economy.
- Money Supply (M0 to M3)Money supply measures the total money in an economy, classified into M0, M1, M2 and M3 by liquidity, from physical cash to broader deposits.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.