Monetarism and its Application in the Australian Economy
Monetarism is a macroeconomic theory predicated on the belief that a capitalist economy is inherently stable. Therefore outside influences on that economy have a destablizing and undesirable effect. Of these "shocks" to an economy money supply changes induced by the monetary authorities of that economy have the strongest effect. Thus monetary movements should be monitered and controlled. The above paragraph is a rough definition of Monetarism. This paper attempts to answer two questions as concerns Monetarism. First of all is Monetarism a valid economic theory? In other words how well does Monetarist theory actually predict the movements of certain economic variables, given changes in other economic variables, most notably money supply growth deviations. Secondly, if Monetarism is a valid economic theory can its implied policy prescriptions in fact be applied in an economy, given institutional and other constraints? Before either of these two questions are answered, however, Monetarist theory is formally derived and defined. Chapter One traces the evolution of Monetarism over time, from the pre-Classical writings of John Locke, David Hume and Richard Cantillon, to the major theorist of today, Milton Friedman. This section attempts to give concrete structure to Monetarism, a foundation on which the two main questions can be answered. An examination of the Australian economy and particularly its monetary policy over the past twelve years helps to answer the two main questions previously presented. This inquiry takes place in Chapter Two. The relationships between economic variables as presupposed by Monetarists, and the implementation of Monetarist based policy actions in Australia 1975-1982 are studied in order to help in the evaluation of Monetarism. This examination is supplemented in Chapter Three by a quantitative analysis of various Monetarist tenets, as econometric techniques are used. The results of the econometric testing are further evidence which can be employed to help answer this paper's base questions. After the questions have been adequately defined and the evidence has been presented, -conclusions can be made. These conclusions hopefully answer the two questions presented. Positive answers to both questions will lead to the affirmation of Monetarism as a viable economic theory and the positive role that it can play in an economy. Monetarism then, is defined, questioned, and evaluated in this paper, in the attempt to ascertain its overall usefulness as an economic theory.