Monetarism

A theory that advances the view that sustained money growth in excess of the growth of output produces inflation. The relationship between money growth and output has not, however, always been precise. For example, in the late 1980s, the rate of inflation fell below the rate of money growth, and this exception suggests that money growth may not necessarily be a sufficient condition for inflation.

Notwithstanding, monetarists argue that the solution to stable prices is the control of money growth, such that expected inflation must be checked by increases in the rate of interest. Rising price level in turn portends a depreciating currency, which can arguably be salvaged by increases in the rate of interest.

One of the empirical observations of monetarism is that escalating prices tend to first have an impact on output, which rises above its long-run growth path, albeit on a temporary basis, before the impact shows up on the price level. Contemporary policymakers now use the monetarist proposition of monetarism to deal with inflation, interest rate, and currency valuation.