Paul Krugman has a recent post on why monetarism failed. Subsequently a number of economics bloggers have replied with their views on monetarism. I don’t have time to summarize all of the viewpoints espoused in these posts, but a fundamental problem throughout these posts is that each author’s description of monetarism seems to be merely their opinion about the distinct characteristics of monetarism. The problem is that many of these opinions do not provide anyone with more than a surface-level view of monetarism (i.e. something one might find in a principles or intermediate macro textbook).
In reality, Old Monetarists not only had views on money and inflation, but also had important views on the monetary transmission mechanism. The role that Old Monetarists saw for money was much more nuanced than the crude quantity theory vision that is often attributed to them. On this note, it is probably more valuable to look to the academic literature that attempts to summarize these ideas and put them into context for a modern reader.
A good place to start for anyone interested in Old Monetarist ideas is the work of Ed Nelson. Nelson is someone who has spent his career studying these ideas and trying to test their importance within modern macroeconomic frameworks. He is also currently working on a book about Milton Friedman’s influence on the monetary policy debate in the United States. To get a sense of what Old Monetarists really believed and why those ideas are relevant, I would recommend Nelson’s 2003 JME paper “The Future of Monetary Aggregates in Monetary Policy Analyis.” Here is the abstract:
This paper considers the role of monetary aggregates in modern macroeconomic models of the New Keynesian type. The focus is on possible developments of these models that are suggested by the monetarist literature, and that in addition seem justified empirically. Both the relation between money and inflation, and between money and aggregate demand, are considered. Regarding the first relation, it is argued that both the mean and the dynamics of inflation in present-day models are governed by money growth. This relationship arises from a conventional aggregate-demand channel; claims that an emphasis on the link between monetary aggregates and inflation requires a direct channel connecting money and inflation, are wide of the mark. The relevance of money for aggregate demand, in turn, lies not via real balance effects (or any other justification for money in the IS equation), but on money’s ability to serve as a proxy for the various substitution effects of monetary policy that exist when many asset prices matter for aggregate demand. This role for monetary aggregates, which is supported by empirical evidence, enhances the value of money to monetary policy.
Here is the working paper version that is not behind a paywall.