Monetary Policy - Inflation - Cures

Further work - Keynesian & Monetarist attitudes to monetary policy

Monetarists
Monetarists do not believe that the government should intervene by trying to manage the level of aggregate demand. They argue that this type of interventionist policy will be destabilising in the long run and should therefore be avoided. A key problem with discretionary demand management policies is the time lags, which monetarists believe make fiscal policy too difficult to use to manage the economy effectively. The best thing therefore, is to take a long-run view of price stability and use monetary policy to achieve this.

Keynesians
Keynesians traditionally see fiscal policy as the key tool of economic management. They see the role of government as maintaining the economy at full employment. The way to do this was to manage the level of aggregate demand until the economy was at or close to full employment. If the economy was growing too fast, then fiscal policy should be essentially deflationary, and vice-versa when below full employment. Monetary policy should, in their view, simply be used as a backup to fiscal policy. However, they would argue that direct interest rate changes could be used to control aggregate demand. Their main objection to monetary policy has always been that there is a weak link between the money supply and aggregate demand, and that the money supply is difficult to control anyway.