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March/April 1990, 
Vol. 72, No. 2
Posted 1990-03-01

The Legacy of the Monetarist Controversy

by David Laidler

This article by David Laidler is a reprint the Fourth Annual Homer Jones Memorial Lecture. Laidler’s paper has two broad themes. The first is that people working in monetary economics in the 1960s and 1970s lost sight of the fundamental issues under debate. For example, while original monetarist arguments stressed long-run relationships between changes in the money stock and other variables, a generation of young economists re-estimated traditional relationships with quarterly data, found instability, and concluded that monetarist propositions had been rejected. Laidler views this conclusion to be misplaced because monetarists had never argued they could (or should) model the complicated short-run dynamics that lead to the long-run relationship of interest. Laidler’s second theme is that ideas from New-classical economics, which were seen originally as supporting monetarist thought, actually subverted it. In particular, the transmission mechanism between changes in money and other variables proposed by monetarists was different in fundamental ways from that proposed by New-classical analysis, and empirical studies eventually rejected important New-classical ideas. But by that time, Laidler argues, many economists had confused traditional monetarist principles with those of New-classical analysis. Laidler concludes that the legacy of the monetarist controversy is an uncomfortable one, with important issues yet to be resolved.

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