The Collapse of Monetarism and the Irrelevance of the New Monetary Consensus

What in monetarism, and what in the "new monetary consensus," led to a correct or even remotely relevant anticipation of the extraordinary financial crisis that broke over the housing sector, the banking system, and the world economy in August 2007 and that has continued to preoccupy central bankers ever since? Absolutely nothing, says Senior Scholar James K. Galbraith.

In this new Policy Note, Galbraith reevaluates monetary policy in light of the collateral damages inflicted by the subprime mortgage crisis. He provides a critique of monetarism—what Milton Friedman famously defined as the proposition that "inflation is everywhere and always a monetary phenomenon"—and of the "new monetary consensus" on which Federal Reserve Chairman Ben Bernanke’s ostensible doctrine of inflation targeting rests. Given the current economic crisis, Galbraith says, the Fed would do well to embrace the intellectual victory of John Maynard Keynes, John Kenneth Galbraith, and Hyman P. Minsky—and act accordingly.