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Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:00.22,0:00:03.79,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:12.47,0:00:14.25,Default,,0000,0000,0000,,- [Tyler] Monetarism is\Nanother framework
Dialogue: 0,0:00:14.25,0:00:16.56,Default,,0000,0000,0000,,for thinking about business cycles.
Dialogue: 0,0:00:16.56,0:00:20.34,Default,,0000,0000,0000,,Nobel laureate Milton Friedman\Nof the University of Chicago --
Dialogue: 0,0:00:20.34,0:00:23.69,Default,,0000,0000,0000,,he was the most famous proponent\Nof monetarism.
Dialogue: 0,0:00:23.69,0:00:26.70,Default,,0000,0000,0000,,And, as the name suggests,\Nmonetarism emphasizes
Dialogue: 0,0:00:26.70,0:00:29.38,Default,,0000,0000,0000,,the importance of the money supply,
Dialogue: 0,0:00:29.38,0:00:32.50,Default,,0000,0000,0000,,and it emphasizes the decisions\Ncentral banks make
Dialogue: 0,0:00:32.50,0:00:35.46,Default,,0000,0000,0000,,about what to do\Nwith the money supply.
Dialogue: 0,0:00:35.73,0:00:38.06,Default,,0000,0000,0000,,Now monetarism is based\Non something called
Dialogue: 0,0:00:38.06,0:00:39.84,Default,,0000,0000,0000,,the quantity theory of money.
Dialogue: 0,0:00:40.12,0:00:41.61,Default,,0000,0000,0000,,That means, in the long run,
Dialogue: 0,0:00:41.61,0:00:44.82,Default,,0000,0000,0000,,the absolute amount of money\Nin an economy doesn't matter,
Dialogue: 0,0:00:44.82,0:00:47.62,Default,,0000,0000,0000,,doesn't influence real output\Nor real employment.
Dialogue: 0,0:00:47.88,0:00:51.74,Default,,0000,0000,0000,,But in the short run, changes\Nin the rate of inflation can matter.
Dialogue: 0,0:00:52.69,0:00:55.34,Default,,0000,0000,0000,,So there are two potential dangers\Nin monetarism:
Dialogue: 0,0:00:55.34,0:00:58.24,Default,,0000,0000,0000,,too much inflation,\Nand too little inflation.
Dialogue: 0,0:00:58.64,0:01:00.86,Default,,0000,0000,0000,,Let's think first\Nabout too much inflation,
Dialogue: 0,0:01:01.13,0:01:02.17,Default,,0000,0000,0000,,because this is a big part
Dialogue: 0,0:01:02.17,0:01:04.43,Default,,0000,0000,0000,,of how monetarism\Nbecame more popular.
Dialogue: 0,0:01:04.71,0:01:07.15,Default,,0000,0000,0000,,In the 1970s, in America,
Dialogue: 0,0:01:07.15,0:01:10.12,Default,,0000,0000,0000,,rates of inflation\Nwere considered to be too high,
Dialogue: 0,0:01:10.38,0:01:12.65,Default,,0000,0000,0000,,and monetarism had a way\Nto explain this.
Dialogue: 0,0:01:12.65,0:01:16.29,Default,,0000,0000,0000,,It said the Federal Reserve\Nwas creating too much new money
Dialogue: 0,0:01:16.29,0:01:17.61,Default,,0000,0000,0000,,for the economy,
Dialogue: 0,0:01:17.61,0:01:19.93,Default,,0000,0000,0000,,and that means\Nprices will be rising
Dialogue: 0,0:01:19.93,0:01:21.89,Default,,0000,0000,0000,,and inflation tends to distort
Dialogue: 0,0:01:21.89,0:01:24.81,Default,,0000,0000,0000,,the allocation\Nof economic resources.
Dialogue: 0,0:01:25.12,0:01:28.02,Default,,0000,0000,0000,,Individuals cannot tell\Nwhich prices are going up
Dialogue: 0,0:01:28.02,0:01:29.60,Default,,0000,0000,0000,,because of the inflation,
Dialogue: 0,0:01:29.60,0:01:31.36,Default,,0000,0000,0000,,and which prices are going up
Dialogue: 0,0:01:31.36,0:01:33.81,Default,,0000,0000,0000,,because something is\Nmore or less valuable,
Dialogue: 0,0:01:33.81,0:01:36.72,Default,,0000,0000,0000,,and that what we should do\Nis lower the rate of inflation
Dialogue: 0,0:01:36.72,0:01:39.35,Default,,0000,0000,0000,,and bring about\Nmore economic stability.
Dialogue: 0,0:01:39.35,0:01:41.95,Default,,0000,0000,0000,,So at the time, a lot\Nof Keynesian economists
Dialogue: 0,0:01:41.95,0:01:44.26,Default,,0000,0000,0000,,were accepting\Nthis higher rate of inflation.
Dialogue: 0,0:01:44.26,0:01:46.35,Default,,0000,0000,0000,,But monetarism was saying that, yes,
Dialogue: 0,0:01:46.35,0:01:50.86,Default,,0000,0000,0000,,at first more inflation is going\Nto get you higher economic output,
Dialogue: 0,0:01:50.86,0:01:54.88,Default,,0000,0000,0000,,but pretty quickly people figure out\Nthat there's inflation going on,
Dialogue: 0,0:01:54.88,0:01:57.53,Default,,0000,0000,0000,,and that inflation\Nceases to be effective
Dialogue: 0,0:01:57.53,0:01:59.66,Default,,0000,0000,0000,,in stimulating the economy.
Dialogue: 0,0:01:59.66,0:02:01.42,Default,,0000,0000,0000,,On the other side of the ledger,
Dialogue: 0,0:02:01.42,0:02:04.66,Default,,0000,0000,0000,,there's the danger that\Nmonetary growth will be too low,
Dialogue: 0,0:02:04.66,0:02:07.92,Default,,0000,0000,0000,,and that means the rate\Nof price inflation will be too low
Dialogue: 0,0:02:07.92,0:02:10.16,Default,,0000,0000,0000,,or there may be\Ndeflation altogether.
Dialogue: 0,0:02:10.51,0:02:12.92,Default,,0000,0000,0000,,And in that setting,\Naccording to monetarism,
Dialogue: 0,0:02:12.92,0:02:15.08,Default,,0000,0000,0000,,aggregate demand will be too low.
Dialogue: 0,0:02:15.35,0:02:18.25,Default,,0000,0000,0000,,In this case, monetarist\Nand Keynesian doctrine --
Dialogue: 0,0:02:18.25,0:02:19.99,Default,,0000,0000,0000,,they're actually pretty similar.
Dialogue: 0,0:02:20.28,0:02:22.02,Default,,0000,0000,0000,,Monetarists, like Keynesians,
Dialogue: 0,0:02:22.39,0:02:25.15,Default,,0000,0000,0000,,believe that a lot\Nof nominal wages are sticky --
Dialogue: 0,0:02:25.47,0:02:28.98,Default,,0000,0000,0000,,that is they can't be readjusted\Nor renegotiated all the time.
Dialogue: 0,0:02:29.45,0:02:33.47,Default,,0000,0000,0000,,This may be a matter of contract,\Nor a matter of law, minimum wages,
Dialogue: 0,0:02:33.47,0:02:36.26,Default,,0000,0000,0000,,or maybe just a matter\Nof workplace morale.
Dialogue: 0,0:02:36.26,0:02:37.97,Default,,0000,0000,0000,,But when you have sticky wages,
Dialogue: 0,0:02:37.97,0:02:40.48,Default,,0000,0000,0000,,and that flow\Nof nominal purchasing power,
Dialogue: 0,0:02:40.48,0:02:42.47,Default,,0000,0000,0000,,that flow of money\Nthrough an economy,
Dialogue: 0,0:02:42.47,0:02:46.36,Default,,0000,0000,0000,,when it declines, well,\Nwages cannot just fall in tandem,
Dialogue: 0,0:02:46.36,0:02:48.89,Default,,0000,0000,0000,,and employers will lay off\Nsome workers,
Dialogue: 0,0:02:48.89,0:02:51.38,Default,,0000,0000,0000,,and you will get\Na business cycle downturn.
Dialogue: 0,0:02:52.27,0:02:55.62,Default,,0000,0000,0000,,So for monetarists,\Nthere's a kind of Goldilocks rule.
Dialogue: 0,0:02:56.23,0:02:58.73,Default,,0000,0000,0000,,It's desired that there be\Na constant rate
Dialogue: 0,0:02:58.73,0:03:00.26,Default,,0000,0000,0000,,of money supply growth.
Dialogue: 0,0:03:00.26,0:03:03.27,Default,,0000,0000,0000,,Sometimes that's been given\Nas about 2 to 3% --
Dialogue: 0,0:03:03.69,0:03:05.71,Default,,0000,0000,0000,,not too high, not too low.
Dialogue: 0,0:03:06.12,0:03:09.76,Default,,0000,0000,0000,,In general, monetarists believe\Nin constraining the central bank
Dialogue: 0,0:03:09.76,0:03:10.97,Default,,0000,0000,0000,,through rules.
Dialogue: 0,0:03:10.97,0:03:13.90,Default,,0000,0000,0000,,They don't trust the central bank\Nto have a lot of discretion,
Dialogue: 0,0:03:13.90,0:03:16.81,Default,,0000,0000,0000,,and to turn on a dime and make\Na lot of very complicated,
Dialogue: 0,0:03:16.81,0:03:18.28,Default,,0000,0000,0000,,precise decisions.
Dialogue: 0,0:03:18.28,0:03:21.99,Default,,0000,0000,0000,,Monetarists emphasize\Nthat lags are long and variable.
Dialogue: 0,0:03:21.99,0:03:25.21,Default,,0000,0000,0000,,The information of policy makers\Ncan be unreliable,
Dialogue: 0,0:03:25.21,0:03:28.84,Default,,0000,0000,0000,,so they simply want the stable rule,\Nwhich rules out the two cases
Dialogue: 0,0:03:28.84,0:03:32.85,Default,,0000,0000,0000,,of inflation too high\Nand inflation too low.
Dialogue: 0,0:03:32.85,0:03:34.44,Default,,0000,0000,0000,,So, so far, so good.
Dialogue: 0,0:03:34.71,0:03:36.75,Default,,0000,0000,0000,,Monetarism has had a huge impact,
Dialogue: 0,0:03:36.75,0:03:39.84,Default,,0000,0000,0000,,and because of Milton Friedman\Nand other monetarists,
Dialogue: 0,0:03:39.84,0:03:43.52,Default,,0000,0000,0000,,economists now look much,\Nmuch more at money supplies
Dialogue: 0,0:03:43.52,0:03:45.43,Default,,0000,0000,0000,,and central bank policies.
Dialogue: 0,0:03:46.15,0:03:49.34,Default,,0000,0000,0000,,But, that said, monetarism\Nstill has some important problems.
Dialogue: 0,0:03:50.04,0:03:52.79,Default,,0000,0000,0000,,First, monetarism is quite\Nan incomplete account
Dialogue: 0,0:03:52.79,0:03:54.13,Default,,0000,0000,0000,,of business cycles.
Dialogue: 0,0:03:54.42,0:03:57.18,Default,,0000,0000,0000,,A lot of business cycles\Ncan be caused by, say,
Dialogue: 0,0:03:57.18,0:04:00.61,Default,,0000,0000,0000,,the bursting of bubbles,\Nor problems in credit markets,
Dialogue: 0,0:04:00.61,0:04:03.06,Default,,0000,0000,0000,,or negative real shocks,\Nor other factors.
Dialogue: 0,0:04:03.34,0:04:06.86,Default,,0000,0000,0000,,And monetarism just doesn't have\Na lot to say about these cases.
Dialogue: 0,0:04:07.06,0:04:09.74,Default,,0000,0000,0000,,Second, monetarism assumes\Nthat there's this notion
Dialogue: 0,0:04:09.74,0:04:13.06,Default,,0000,0000,0000,,of "the money supply"\Nas a single, well-defined thing.
Dialogue: 0,0:04:13.47,0:04:15.13,Default,,0000,0000,0000,,But, in fact, empirically there are
Dialogue: 0,0:04:15.13,0:04:17.06,Default,,0000,0000,0000,,many different\Nmoney supply measures.
Dialogue: 0,0:04:17.28,0:04:18.65,Default,,0000,0000,0000,,There are narrow measures,
Dialogue: 0,0:04:18.65,0:04:22.22,Default,,0000,0000,0000,,such as currency\Nplus bank reserves held at the Fed.
Dialogue: 0,0:04:22.22,0:04:25.82,Default,,0000,0000,0000,,Or you could add in\Ndemand deposits, savings deposits,
Dialogue: 0,0:04:25.82,0:04:28.20,Default,,0000,0000,0000,,different kind\Nof credit relationships.
Dialogue: 0,0:04:28.20,0:04:30.89,Default,,0000,0000,0000,,Which of those is the true\Nreal money supply?
Dialogue: 0,0:04:30.89,0:04:32.80,Default,,0000,0000,0000,,Which of those should we stabilize?
Dialogue: 0,0:04:33.05,0:04:34.51,Default,,0000,0000,0000,,It turns out\Nthose different measures
Dialogue: 0,0:04:34.51,0:04:35.74,Default,,0000,0000,0000,,of the money supply --
Dialogue: 0,0:04:35.74,0:04:38.33,Default,,0000,0000,0000,,they don't always\Nmove together so closely.
Dialogue: 0,0:04:38.33,0:04:41.06,Default,,0000,0000,0000,,And if we stabilize one of them,\Nwell, other measures
Dialogue: 0,0:04:41.06,0:04:44.18,Default,,0000,0000,0000,,of the money supply\Nmay not be that stable at all.
Dialogue: 0,0:04:44.39,0:04:47.25,Default,,0000,0000,0000,,Finally, there's another problem\Nwith monetarism.
Dialogue: 0,0:04:47.25,0:04:50.24,Default,,0000,0000,0000,,If the central bank really does\Nfix a rate of growth
Dialogue: 0,0:04:50.24,0:04:51.51,Default,,0000,0000,0000,,for the money supply,
Dialogue: 0,0:04:51.51,0:04:55.22,Default,,0000,0000,0000,,this can make it harder to respond\Nto other kinds of shocks.
Dialogue: 0,0:04:55.22,0:04:56.91,Default,,0000,0000,0000,,What if there's\Na negative real shock,
Dialogue: 0,0:04:56.91,0:04:59.07,Default,,0000,0000,0000,,such as an oil price hike?
Dialogue: 0,0:04:59.07,0:05:01.20,Default,,0000,0000,0000,,Some economists think\Nthe central bank
Dialogue: 0,0:05:01.20,0:05:03.70,Default,,0000,0000,0000,,should then be more expansionary.
Dialogue: 0,0:05:03.70,0:05:05.96,Default,,0000,0000,0000,,What if interest rates\Nturn volatile?
Dialogue: 0,0:05:05.96,0:05:09.49,Default,,0000,0000,0000,,Maybe then, again, the central bank\Nshould expand credit a bit more.
Dialogue: 0,0:05:09.49,0:05:11.56,Default,,0000,0000,0000,,There may be a shock to velocity.
Dialogue: 0,0:05:11.56,0:05:13.56,Default,,0000,0000,0000,,The rate at which\Nthat money turns over
Dialogue: 0,0:05:13.56,0:05:15.48,Default,,0000,0000,0000,,in the economy may change.
Dialogue: 0,0:05:15.48,0:05:18.14,Default,,0000,0000,0000,,And, at least under\Nsimple forms of monetarism,
Dialogue: 0,0:05:18.14,0:05:21.42,Default,,0000,0000,0000,,again, the central bank\Ncannot easily adjust for that.
Dialogue: 0,0:05:21.42,0:05:22.73,Default,,0000,0000,0000,,It's the case, in fact --
Dialogue: 0,0:05:22.73,0:05:25.27,Default,,0000,0000,0000,,there's now an offshoot doctrine\Nof monetarism,
Dialogue: 0,0:05:25.27,0:05:29.55,Default,,0000,0000,0000,,sometimes called market monetarism\Nor nominal GDP targeting,
Dialogue: 0,0:05:29.55,0:05:31.74,Default,,0000,0000,0000,,that says, yes,\Nwe start with monetarism,
Dialogue: 0,0:05:31.74,0:05:34.04,Default,,0000,0000,0000,,but we actually want\Nto allow the central bank
Dialogue: 0,0:05:34.04,0:05:37.88,Default,,0000,0000,0000,,the ability to respond\Nto those changes in velocity.
Dialogue: 0,0:05:38.09,0:05:41.44,Default,,0000,0000,0000,,Now monetarists, who generally\Ndo not trust in discretion,
Dialogue: 0,0:05:41.44,0:05:43.29,Default,,0000,0000,0000,,are willing to put up\Nwith these shocks,
Dialogue: 0,0:05:43.51,0:05:45.58,Default,,0000,0000,0000,,but in the real world\Nthere's a big debate --
Dialogue: 0,0:05:45.58,0:05:48.30,Default,,0000,0000,0000,,many people believe\Nthe central bank actually should go
Dialogue: 0,0:05:48.30,0:05:51.44,Default,,0000,0000,0000,,beyond the confines\Nof this very limited rule
Dialogue: 0,0:05:51.44,0:05:54.13,Default,,0000,0000,0000,,and try to offset some\Nof these other kinds of shocks
Dialogue: 0,0:05:54.13,0:05:55.53,Default,,0000,0000,0000,,hitting an economy.
Dialogue: 0,0:05:55.83,0:05:58.99,Default,,0000,0000,0000,,So, in sum, monetarism\Nis really important,
Dialogue: 0,0:05:58.99,0:06:00.56,Default,,0000,0000,0000,,but still it is considered
Dialogue: 0,0:06:00.56,0:06:03.75,Default,,0000,0000,0000,,a somewhat incomplete doctrine\Nof business cycles.
Dialogue: 0,0:06:05.59,0:06:07.57,Default,,0000,0000,0000,,- [Narrator] You're on your way\Nto mastering economics.
Dialogue: 0,0:06:07.57,0:06:11.00,Default,,0000,0000,0000,,Make sure this video sticks\Nby taking a few practice questions.
Dialogue: 0,0:06:11.00,0:06:13.11,Default,,0000,0000,0000,,Or, if you're ready\Nfor more macroeconomics,
Dialogue: 0,0:06:13.11,0:06:14.64,Default,,0000,0000,0000,,click for the next video.
Dialogue: 0,0:06:16.28,0:06:17.31,Default,,0000,0000,0000,,Still here?
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Dialogue: 0,0:06:20.52,0:06:23.24,Default,,0000,0000,0000,,♪ [music] ♪