Monetarism vs. New Keynesian Economics

Attribute	Monetarism	New Keynesian Economics
Key Figure	Milton Friedman	John Maynard Keynes
Focus	Money supply	Aggregate demand
Role of Government	Minimal intervention	Active intervention
Price Stickiness	Believes in flexible prices	Believes in sticky prices
Expectations	Assumes rational expectations	Considers adaptive expectations

Introduction

Monetarism and New Keynesian Economics are two prominent schools of economic thought that have had a significant impact on economic policy and theory. While both approaches share some similarities, they also have distinct differences in their views on the role of government, the importance of monetary policy, and the causes of economic fluctuations.

Monetarism

Monetarism is a school of economic thought that emphasizes the role of money supply in determining economic outcomes. Developed by economist Milton Friedman in the 1960s, Monetarism argues that changes in the money supply have a direct impact on inflation and economic growth. Monetarists believe that the government should focus on controlling the money supply through monetary policy to stabilize the economy.

One of the key attributes of Monetarism is its focus on the quantity theory of money, which states that changes in the money supply lead to proportional changes in the price level. Monetarists argue that inflation is primarily a monetary phenomenon and that controlling the money supply is the most effective way to combat inflation. They also believe that central banks should have a clear and transparent monetary policy rule to guide their actions.

Monetarism also emphasizes the importance of long-run economic stability and believes that fluctuations in the money supply can lead to business cycles. Monetarists advocate for a stable growth rate in the money supply to avoid excessive inflation or deflation. They argue that a predictable and steady increase in the money supply can help promote economic growth and stability over the long term.

New Keynesian Economics

New Keynesian Economics is a school of economic thought that builds on the ideas of British economist John Maynard Keynes. Developed in the 1980s as a response to Monetarism, New Keynesian Economics incorporates elements of Keynesian economics with a focus on microeconomic foundations. New Keynesians believe that prices and wages are sticky in the short run, leading to market inefficiencies and the potential for government intervention.

One of the key attributes of New Keynesian Economics is its emphasis on market imperfections and the role of government in stabilizing the economy. New Keynesians argue that prices and wages do not adjust instantaneously to changes in demand, leading to unemployment and inefficient resource allocation. They believe that government intervention, such as monetary and fiscal policy, can help mitigate these market failures and stabilize the economy.

New Keynesian Economics also incorporates the concept of rational expectations, which suggests that individuals form expectations about future economic conditions based on all available information. New Keynesians believe that policymakers should take into account these expectations when formulating economic policy to achieve better outcomes.

Comparing Attributes

While Monetarism and New Keynesian Economics have some similarities, such as their focus on the importance of monetary policy in influencing economic outcomes, they also have distinct differences in their views on the role of government and the causes of economic fluctuations. Monetarists tend to advocate for a hands-off approach to government intervention, relying on the central bank to control the money supply and stabilize the economy. In contrast, New Keynesians believe that government intervention is necessary to address market failures and stabilize the economy in the short run.

Another key difference between Monetarism and New Keynesian Economics is their views on the causes of economic fluctuations. Monetarists attribute fluctuations in the economy primarily to changes in the money supply, arguing that controlling the money supply is the most effective way to stabilize the economy. New Keynesians, on the other hand, focus on market imperfections and the role of government intervention in addressing these inefficiencies to stabilize the economy.

Additionally, Monetarism and New Keynesian Economics have different views on the effectiveness of monetary policy in influencing economic outcomes. Monetarists believe that central banks should have a clear and transparent monetary policy rule to guide their actions, while New Keynesians emphasize the importance of taking into account expectations and market imperfections when formulating economic policy.

Conclusion

In conclusion, Monetarism and New Keynesian Economics are two influential schools of economic thought that have shaped economic policy and theory over the past few decades. While both approaches share some similarities, such as their focus on the importance of monetary policy, they also have distinct differences in their views on the role of government and the causes of economic fluctuations. Understanding the attributes of Monetarism and New Keynesian Economics can provide valuable insights into the ongoing debates in economic policy and theory.