Monetarism and Monetary Policy

Abstract Starting in the 1960s, Milton Friedman defined the monetarist‐Keynesian debate. His greatest victory occurred by the end of the 1970s when he argued that the Federal Reserve System, not corporations and unions with market power, was responsible for inflation. However, monetarism retreated in the early 1980s when high rates of growth of money failed to predict inflation. This paper re‐exposits the quantity theory of money and monetarism in an attempt to again make relevant Friedman's arguments for a rules‐based monetary policy and for an understanding of how in actual practice central banks control inflation assuming inflation is a monetary phenomenon.