His concept of wealth includes more than just assets like cash, bonds, equities, etc. Money will be traded or substituted for financial assets and this process of trading or substituting money for other financial assets will be carried to the point, at which owners find no advantage in further trading or substitution of this kind. Clark Warburton is credited with making the first solid empirical case for the monetarist interpretation of business fluctuations in a series of papers from 1945. p. 493 Within mainstream economics, the rise of monetarism accelerated from Milton Friedman's 1956 restatement of the quantity theory of money. Thus, one of the great implications of Friedman’s or monetary approach is that because there is a stable relationship between the quantity of money and the level of national income in the long-run, the task of the monetary authority is to let the money supply rise in accordance with the growth rate of GNP. Each of these variables may be viewed as the rate of yield of a particular type of asset—the yield on bonds, on human and on non- human capital, the yield of money itself as a means of avoiding risk and adding to convenience. It is probably fair to say, that a minimum consensus has been reached—regarding the following: (a) People’s decisions regarding their holding of money as well as other assets should be studied by the application of the general theory of choice—to use Johnson’s phrase. They also argue that since non- money financial assets are so close substitutes of money, changes in the interest rates on non-money financial assets change the quantity of money demanded by relatively larger amounts. Friedman part de ce que les économistes appellent l'équation quantitative de la monnaie dans sa forme p.T=M.V (où p représente les prix, T le volume des transactions, M la masse monétaire et V la vitesse de circulation de la monnaie), qui exprime une relation de proportionnalité entre la quantité de monnaie nécessaire pour réaliser des transactions au cours d'une période donnée et la valeur monétaire de ces transactions. Although Friedman’s approach is fairly different from the cash balance approach, he has followed it in emphasizing choice and the marginal character of monetary decisions. He includes in wealth various types of tangible capital (like producer and consumer durable goods) and human capital. Thus, there will be a smaller demand for nominal money balances and the reverse would happen if the price level was expected to fall. To Monetarists and Friedman, it is real assets and not financial assets that are close substitutes for money. Assuming, in a broad sense, that there is a rate of return on all assets, in that all these assets provide their owners with benefits and further assuming that people are satisfied with their holdings of existing money balances—an increase in the supply of money would cause them to spend their additional money on financial assets. Monetarists argue that both C and I type of expenditures depend on interest rate, these expenditures are highly interest elastic so that IS schedule is highly interest elastic. Gone, too, are such fiscal policy devices as the investment tax credit and accelerated depreciation allowances. Because the economy is subject to deep swings and periodic instability, it is dangerous to make the Fed slave to a preor-dained money target, they believe—the Fed should have some leeway or “discretion” in conducting policy. 2 Time 3 The traditional approach of the quantity theory … Il considère, en outre, que le mécanisme monétaire déterminant est celui de la demande de monnaie, c'est-à-dire des besoins en monnaie estimés par les agents économiques et non pas celui de l'offre de monnaie, c'est-à-dire de la quantité de monnaie mise en circulation par la banque centrale. He begins from the broad concepts of wealth as comprising all sources of income, including human beings and relates the demand for money to total wealth and the expected future streams of money income obtainable by holding wealth in alternative form. Advocates of monetary approach have not yet shown that the changes in money supply have a reliable and predictable effect on expenditure, even the direction of causation between the money supply and income is at issue. Monetarists contend that following an increase in the money supply, there can be a portfolio adjustment involving a movement out of money directly into goods and services or assets. According to the former school, an increase in the money supply means that some money holders will have excess money balance in their asset portfolios. Assuming full employment, the increased demand will pull prices higher. The Monetarism and Friedman’s Modern Quantity Theory of Money! Nevertheless, some substitution is possible ; people can sell assets in order to pay for training which will increase their future earnings, and their expected earnings also influence, the amount which they can borrow and hence their gross asset holdings. He believes that the demand for money is not interest-elastic and what the people choose to do is to hold more real assets or goods and less money or to substitute real assets for money. approach to economics that centers on the money supply (the amount of money in circulation This means that the LM schedule is very interest elastic. The central points in the restatement are that the quantity theory is a theory of the demand for money and not of income or prices, so that money is an asset or capital goods, so that the demand for it is a problem in capital theory. For well over 200 years in economic literature, the quantity of money has been singled out for special attention, reflecting the common belief that money, prices and economic activities are in some way linked. Privacy Policy3. Pour les « classiques » (ceux qui se réclament de l'école de pensée libérale issue d'Adam Smith) et leurs successeurs, le chômage résulterait d'une offre d'emploi bridée pour différentes raisons : taxation excessive, règles freinant ou empêchant la concurrence et la création d'entreprises, et, plus généralement, obstacles a […] Stability is ensured by market forces which change prices and rates of return in response to these exogenous shocks. An increase in G will initially cause the Y to rise but the increase in Y, given k will cause people to choose to hold higher levels of cash balances, for which they may have to decrease their consumption expenditures. It is controlled by the central banks of a sovereign country. With these simplifications the demand function can be written as M = f (P, r, Yp, U) with W substituted for Yp, in some instances in the simplified form. Some changes in aggregate demand, they contend, are caused due to strikes and changing expectations or events about future. Keynesians, however, place major emphasis on the influence of fiscal policy, on the components of aggregate demand (C + I + G). Toute augmentation de la masse monétaire décidée par les autorités monétaires et non désirée par les agents économiques est sans effet sur le comportement de ces dernie [...], 1  The Keynesian liquidity preference theory can still be defended, to some extent, on the ground that, if unemployment exists, changes in money supply may lead to more spending and expanded output rather than higher prices. If the rate of interest on equities is re i.e., £1 of equities can be expected to yield annually the sum of £ re if prices are stable, the nominal rate of return is affected both by changes in this rate of interest and by changes in the price level. Lire la suite, Dans le chapitre « Monétarisme moderne et courbe de Phillips » Human wealth is the discounted value of the expected stream of earned income. Monetarism: An Introduction: The quantity theory of money as put forward by classical economists emphasised that increase in the quantity of money would bring about an equal proportionate rise in the price level. His greatest contribution lies in … 11-12 février 1985, https://www.universalis.fr/encyclopedie/milton-friedman/, Anticipations et arbitrages de la politique économique, Les « Chicago boys » et le « modèle » chilien, Conséquences de l'indexation prix-salaires, Monétarisme moderne et courbe de Phillips, Une critique globale des politiques de relance, dictionnaire de l'Encyclopædia Universalis. Changes in rates of return and prices cause portfolio adjustments to occur until the actual and desired stocks are again equal. Their contribution lies in relating the effect of demand management (monetary instruments) of any kind to output, prices and employment. Similarly, an expected increase in the price level has the effect of making it more costly to hold money, since both the real value of money balances will be lessened and the market value of other assets will rise. Like money, their real return is affected by changes in the price level, but it is also affected by changes in the rate of interest on bonds. Monetarists define the physical wealth of the economy to include not only real assets held by firms but consumer durables held by households. (i) The total wealth in all forms of the households or business firms; (ii) The opportunity cost of holding money; (iii) The tastes and preferences of the wealth holding unit. The role of money, they find is much broader, as it is the crucial determinant of GNP. In the theory of demand as it has been developed, the key variables include first, wealth or some counterpart of wealth. Let the money supply increases by Rs. Money in his analysis is viewed like any other commodity or good which yields some utility through its possession.  : […] Equilibrium can only be established when the amount of money held is 1/6 of national income. As a result, there will be a decrease in private spending which will just balance the increase in G. The equilibrium level of national income will not change and the fiscal policy, as a result is rendered useless. Thus, supply of money should be checked on the monetary policy to maintain the price stability. Ses idées trouvent leur cohérence dans l'opposition systématique au keynésianisme dominant des années où il commence sa carrière. In other words, no one can hold more money than the total of the individual’s defined wealth in all forms. On the one hand, it has led to an emphasis on near moneys—as an alternative source of liquidity embodied in the work of Gurley-Shaw and their analysis of financial intermediaries in providing money substitutes. 100 crore. In principle, the limitations on substitutability make a case for distinguishing between human and non- human wealth in the demand function, which can be done by including in it the ratio of non-human to human wealth, w. Finally, the wealth constraint must enter the demand function. Lire la suite, Dans le chapitre « Conséquences de l'indexation prix-salaires » The main difference between these demand functions and that derived from the Keynesian approach is the former’s emphasis on wealth as opposed to current income, and the omission of any unstable element, such as is implied by the speculative demand for money. In its most elementary form, his theory holds that the demand for money varies directly with the first two and inversely with the latter two. Increased demand of these real assets will mean higher prices which will stimulate production of more goods and investment. Disclaimer Copyright, Share Your Knowledge However, monetary factors are not unimportant; there is no reason to reject the view that changes in the money supply will affect income either directly or indirectly via changes in interest rates or the availability of credit. Since all wealth yields rates of return, monetarists argue that changes in the money supply will affect the real asset holdings of households in the same way that they affect changes in the real asset holdings of firms. ÉCONOMIE (Histoire de la pensée économique) - Les grands courants. If the price level falls, money appreciates and shows a capital gain in real terms which must be added to the nominal yield, while in the more common condition of rising prices a real capital loss has to be deducted from the nominal yield. This school is called the ‘monetary school’ and gives no special emphasis on the rates of interest on the financial assets. […] Unlike Fisher, Friedman does not view velocity as an institutional datum nor as a numerical constant, but rather as a functional relationship in which the demand for money is a function of a number of variables within the system, such as interest rate (its structure and types), income, wealth and expected changes in the price level. Théoricien le plus représentatif du monétarisme, Milton Friedman (1912-2006) a étudié l'évolution des prix et la quantité de monnaie en circulation aux États- […] express doubts over the mechanisms that would make only money matter. Au-delà de la terreur politique et du changement de régime qu'il induit, le coup d'État du 11 septembre 1973 est également à l'origine d'une véritable rupture économique, dotant la junte d'une identité que ne pouvait lui fournir un projet politique quasi inexistant. The monetarist tradition illustrates the behavioral perspective adduced to velocity via adaptive price expectations by earlier quantity theorists leading to a capital-theoretic reformulation of the quantity theory in terms of a stable demand function for money. Thus, Friedman’s theory of the role of money supply in the economic model is not convincing too many—the proposition cannot be discarded but neither can it be accepted. (c) The money supply will help determine several variables, including the price level, but including also the level of output. But, critics maintain that a change in the price level occurs independently and this later on influences money supply. It presents a problem because it can be substituted only to a very limited extent with other forms of asset holding. Welcome to EconomicsDiscussion.net! This website includes study notes, research papers, essays, articles and other allied information submitted by visitors like YOU. In the absence of wealth effects, there appears to be no way to explain how a change in money can have a direct effect on the income level. Milton Friedman est un économiste américain né le 31 juillet 1912 à Brooklyn (New York) et mort le 16 novembre 2006 à San Francisco, considéré comme l'un des économistes les plus influents du XXe siècle1. (iii) w = The ratio of non-human wealth to human wealth. (vii) ∆p = The expected change in price level. Such an approach facilitates the integration of monetary theory and the rest of the economic theory. Nevertheless, it is also obvious that we cannot dismiss the money supply and other financial factors as unimportant in the determination of economic activity; rather it is to be understood that interest rates and the supply of credit may have a considerable impact on economic activity and that the monetary authorities have the ability to control these variables. According to the quantity theory of money, increases in the supply of money, given its velocity, lead to increases in the total money ex­penditure. When more money is in circulation, more business transactions are enabled and more money gets spent, stimulating the economy, according to proponents of the theory. Modern Version of Milton Friedman—Basis of Monetarism. Friedman makes use of permanent income Yp—a weighted average of current and past values of income—as an indicator. Here the most important thing that has happened has been a tendency to move away from the division of assets, not only into bonds but also into equities and real assets. They contend that changes in the money supply are the single and most important factor in the determination of the level of real output, employment and prices. They claim, there is, rather, the theory of money, which includes the elements of the quantity theory. Monetarists view the demand for money balances as ultimately a demand for real balances, which means that nominal balances must be adjusted for changes in the price level. Here, we have hardly touched one aspect of what is actually a wide ranging debate between Keynesianism and Monetarism. Lire la suite, Dans le chapitre « Monétarisme et néo-libéralisme » Auteur abondant, Milton Friedman cultive plusieurs registres, celui de l'universitaire rigoureux comme celui du militant et du polémiste habile qui soutient le Parti républicain et tient une chronique dans le magazine Newsweek. Getting into our second year of economics, are we? For example, if a deficit is created in an attempt to stimulate the economy, the monetarists argue that such a policy will not be successful unless it is accompanied by an increase in the supply of money. He uses the modern theory to explain major depression as well as inflation. In monetary economics, the quantity theory of money (QTM) states that the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply.For example, if the amount of money in an economy doubles, QTM predicts that price levels will also double. Jean-Marc DANIEL, One may ask why has he included in the analysis a variable w representing the ratio of non-human to human wealth? Lire la suite, Dans le chapitre « Paniques bancaires et crise financière » Keynes perceived a substitution effect among money, financial assets and real assets. Equities stand for assets which promise a perpetual income stream of constant real amount. No measure of expected gains or losses due to changes in interest rates is available, so these terms are usually dropped from the demand function. There are conflicting views of the mechanism as to how money supply affects the general economic activities or income level. 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