From the Monetarist view
that I am taking, of course, nothing could be more conventional than "quantitative easing" It is just another way to say "increasing the money supply" The Fed does this by buying something other than short-term government securities--long-term governments bonds, for example--but almost any asset would do.
These models reflect the theoretical difference that exists between Keynesian and monetarist views
of the transmission mechanism and the international adjustment process.
In the strict monetarist view
inflation would only be a monetary phenomenon if the coefficient of the error correction term ([upsilon]) is statistically significant (Durevall and Ndung'u, 2001; Enders, 1995).
The monetarist view
can be summarized by a belief that lags in the implementation of monetary policy create a situation in which it is generally impossible to properly time monetary stimulus and contraction.
For an example of a study that supported the monetarist explanation of inflation, see Darrat (1986), and for an example of studies that refuted that monetarist view
, see Saini (1982), and Ghatak and Deadman (1989).
Thus, whereas the monetarist view
focuses on bank panics and monetary aggregates to explain crises, the asymmetric information theory looks at more particular microeconomic failures in institutions or markets.
But if the pronouncements of critics of the monetarist view
are heeded, the result will most likely be erratic fluctuations in the money stock caused by attempts to 'fine tune' the economy.
For overall inflation, the monetarist view
that inflation is always and everywhere a monetary phenomenon (Friedman, 1963, p.
Some authors (see the list of references in both Appendix 1 and Appendix 2) have used a statistically significant positive relation between income, Y, and international reserves holdings of the central bank, R, as evidence favoring a monetarist view
over the Keynesian approach.
This section briefly reviews the evolution of two prominent views on the neutrality of money: the Keynesian view and the monetarist view
In this monetarist view
, acceleration and deceleration of the price level around the maintained rate of inflation reflect supply shocks, unanticipated changes in money, and innovations in velocity.
That is, if money is exogenous as per the Monetarist view
then, to the extent that changes in the quantity of money are associated with changes in the price level, money is, by definition, playing a causal role.