From the conciliatory mood of the 1940s and 1950s, where we saw how Keynesianism and Neoclassicism could fit together, we move away from the Neoclassical Synthesis and back to a determinedly ‘laissez faire’ attitude with Monetarism. This current popularises government intervention as firmly limited to guaranteeing market safeguards and intervening in the financial markets, abandoning fiscal policy. We move, therefore, into an era concerned with financial stability, where inflation becomes a firm target.
Monetarism became popular amongst, famously, US and UK politicians in the 1980s, coinciding with a period of severe stagflation, and is, to this day, a controversial school of Economics, paradoxically known because of its affinity to various legislatures despite being a firm advocate of the separation between politics and economics.
Monetarism, a doctrine opposed to Keynesianism, from which we must highlight
Milton Friedman, the clear leader of the
Chicago school, specially during the 50s and 60s.
Importance of expectations:
Adaptive expectations, as opposed to money illusion, which was implemented into the
Expectations-augmented Phillips curve, that demonstrated the inefficiency of monetary policies aimed at reducing unemployment. Therefore, in the long run, the
Natural rate of unemployment will persist.