Monetarists - Policies

Since the work of Monetarists is mainly limited to their view of inflation, their policy recommendations are pretty much on inflation only as well. They tend to believe that if you control inflation as the main priority, then this will create stability and the economy will be able to grow at its optimum rate.

The key policy is therefore control of the money supply to control inflation. The government should certainly not intervene to try to reduce unemployment as the economy will automatically tend to the natural rate of unemployment. The only way to change the natural rate is through the use of supply-side policies.

All of this makes Monetarists' policy recommendations pretty similar to those of the classical economists.

Supply-side policies

Supply-side policies can be used to reduce market imperfections. This should have the effect of increasing the capacity of the economy to produce (in other words the long-run aggregate supply). They should therefore reduce the natural rate of unemployment. This will be the only non-inflationary way to get increases in output.

Using supply-side policies has increased the level of output from Qfe1 to Qfe2, but the price level has remained stable. Supply-side policies as we have said are ones that reduce market imperfections. They may include:

• Improving education & training to make the work-force more occupationally mobile
• Policies to make people more geographically mobile (scrapping rent controls, simplifying house buying to speed it up, ......)
• Reducing the power of trade unions to allow wages to be more flexible
• Getting rid of any capital controls
• Removing unnecessary regulations

Money supply policies

The real key to Monetarist policy though is the control of monetary growth. In this way (as predicted by the Quantity Theory of Money) the Monetarists would be able to maintain low inflation. Policies might include:

• Open-market operations
• Funding
• Monetary-base control
• Interest rate control

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