Monetarism and Keynesianism

In Macroeconomics Monetarist economic model is contradictory to Keynesian model.

They approach the economy in a different manner particularly the role of money in influencing GNP, Price Level and economic growth or employment. This makes co-ordination of monetary and Keynesian fiscal policy difficult in practice. That is Neo Keynesian approach is mostly be effective in actual practice as they take the weaknesses of the two opposing views and there fore to combine monetary and fiscal policy to stabilization of the economy at high levels of employment at a reasonable rate of inflation in the short and in the long –term. However, the two opposing schools have high degree of trust in it dynamism and its tendency to come to equilibrium and the scope for economic growth in the long term.  In this essay I will discuss the basis of monetarism and Keynesianism and verify them against empirical evidence and highlight their limitations in achieving macroeconomic goals in practice. It also highlights the complexity of inflation and the non-monetary factors in a market economy, which can cause less than full employment and ability to absorb shocks and come to equilibrium at least in short-term. It also highlights the long-term unemployment in some countries where there is less government intervention and the inability to solve long-term unemployment by monetary policy alone.

The Basis of Monetarism

According to monetarist the money plays a very important role in achieving full employment and the level of price levels and real economic growth.  That is according to monetarist if money supply growth is in relation with real GNP then the price level not being affected. However, if money supply is excessive the it will not affect output but has an impact on prices because of their revamped quantity theory of money. In effect, monetarist believes the market system is inherently stable and can absorb shocks and come in to equilibrium at near full employment if the money supply is in relation with GNP. They also says that monetary acceleration is different from money supply growth and if money acceleration is their in an economy it will increase output and employment than increase in prices. If effect monetarist assumes inflation is primarily a monetary phenomenon. They insist to have strict monetary targets and control money supply as means to macroeconomic stabilization and minimum discretionary monetary policy and government intervention in the market by government policy or fiscal measures because they will increase inflation and they will not impact on output or increase in GNP particularly if the economy is at NAIRU.  According to monetarists the boom and bust is caused by unnecessary government policy and not caused by market economy instability or its ability to come in to equilibrium at or near full employment levels. In effect, according to monetarists fiscal policy is in effective in the short-term and in the long-term in stabilizing the economy but destabilize the economy.