International Monetarism

Abstract

As we have seen, monetarist theory has never succeeded in showing exactly how changes in the money supply determine the level of prices. One school of monetarist economists, usually described as the international monetarists, have however advanced their own view as to how this transmission mechanism works. Their argument is that, under a regime of floating exchange rates, changes in the domestic money supply will cause the exchange rate to rise and fall and that it is this movement of the exchange rate which governs the level of prices. This argument warrants special attention for two reasons; first, it has been, until recently at least, very influential in UK policy-making; and secondly, it leads to policy prescriptions which are almost diametrically opposed to those which we believe are desirable in the interests of the UK economy.