The Poverty of Monetarism

Patrick Bolton

Journal of Applied Corporate Finance, 2020, vol. 32, issue 4, 49-67

Abstract: In this edited transcript of a lecture presented in Beijing in December 2019, the author provides a critique of the theory of monetarism that focuses on the difficulty of reconciling its main tenets with growing evidence, especially since the great financial crisis, of the murky relationship between growth in the money supply and rates of inflation and GDP growth. The central critique of monetarism spelled out in the lecture, which draws on Hyman Minsky's response to Milton Friedman and Anna Schwartz's seminal article (both published in the same volume in 1965), is the theory's failure to account for how money enters and spreads throughout the economy. Drawing a novel analogy between fiat money for nations and equity for corporations, the author brings fundamental concepts from corporate finance, such as the dilution costs associated with equity issuance, to bear on monetary economics. In so doing, he shows how the classical monetarist framework can be expanded to provide a fuller account of how changes in money supply affect the economy. By keeping track of how money enters the economy—through purchases of investment goods and financial assets—and by assessing whether money is used to fund productive activities, the author shows how and why increases in the money supply need not, and often do not, lead to higher inflation. This corporate finance framing of monetary economics is also used to shed a skeptical light on claims associated with both crypto‐currencies and Modern Monetary Theory.

Date: 2020
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