Rules Rather Than Discretion
Keynesians tended to favor fiscal policy over monetary policy as a means of influencing production and employment. Most Keynesians, observing that the influence of money is quite indirect, question whether monetary policy is powerful enough to do the job.
One might think that Monetarists would take the opposite side, and favor monetary policy, since they regard fiscal policy as an illusion. But they do not. True, Monetarists believe that money has a very powerful influence on the economy. But they see that influence as being largely for bad, rather than good. Monetarists doubt that the government can act quickly and precisely enough to guide monetary policy effectively. So they oppose any activist monetary policy.
The Monetarist position then is that the government should not attempt to influence aggregate demand at all. Fiscal policy is an illusion and should be avoided. As for the money supply, it should be governed by a simple rule -- specifically, the supply of money should be allowed to increase at a steady rate about equal to the long-term rate of growth of production, so that balanced growth could occur.
Of course, there is also a broad middle ground of economists who argue that monetary policy can be used effectively and should be. The ideas of this group are sometimes called the "neoclassical synthesis." I suspect that the compromisers are in the majority. In any case, the compromise viewpoint seems to be the one that most influences the Fed and other macroeconomic policy makers since the mid-1980's.
Rules Rather Than Discretion
Copyright