Monetarism: An Overview When Dealing Research Paper

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Under Paul Volcker's chairmanship of the Federal Reserve from 1979-1987, to uphold a philosophy Volcker identified as monetarist, the Fed would try to hit specified monthly targets for the growth rate of the monetary supply, "with operating procedures that emphasized control over a narrow and controllable monetary aggregate, non-borrowed reserves (i.e., bank reserves minus borrowings from the Fed)" (McCallum 2008).

After an initial painful period of recession, Volcker's actions had the desired effect upon inflation rates. However, both monetarists and non-monetarists were quick to point out that despite the attempt to hit monthly targets, "because growth rates of M1 fluctuated very widely on a month-to-month basis; the operating procedures in place were, because of lagged reserve requirements, extremely poorly designed for the control of M1; and the Fed never forswore discretionary responses to current cyclical conditions" (McCallum 2008). In fact, "Volcker's strategy to defeat double-digit inflation had been classically Keynesian: reign in the money supply, and accept a deep recession in the process" to bring down interest rates (Kangas 2010).

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As inflation became less of a problem in the late 1980s, pure monetarism fell out of favor amongst economists. The current, aggressive response of the Fed to the credit crisis has taken the form of near-zero interest rates and aggressive lending to banks (combined with federal stimulus money). This might appear to be the final nail in the monetarist coffin. However, if hyper-inflation once again rears its ugly head, monetarism may once again experience a brief upsurge in popularity -- it could be argued that the popularity of extreme economic theories is just as cyclical as the business cycle itself. As Keynesianism is obsessed in dealing with recessions, monetarism is obsessed with curtailing inflation, and whatever economic ill predominates determines the popularity of the economic philosophy in dealing with that conundrum......

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