By the late 1950s, the majority of macroeconomists had arrived at a sort of consensus about macroeconomic theory and macroeconomic policy making. The theory consisted of a short-run view of the world that looked approximately like the IS-LM and AS-AD models. The long-run view was more like the classical model: in which prices and wages would eventually adjust so that the economy returned to the natural rate of output. Fiscal and monetary policy had effects on output and employment that lasted for a number of years, but the policy tools could not be used to change output forever. Economists were also optimistic that the central bank and the government could use their policy tools effectively to stabilize the economy.
Beginning in the late 1950s, but taking many years to surface as an important policy alternative, Milton Friedman and colleagues began to espouse a different view. Their world-view was conceptually similar to that of most macroeconomists, but they differed in certain key areas:
Monetary policy had larger impacts on output than was generally recognized.
Central banks did not really have a good handle on using monetary policy. Changes in the money supply had uncertain effects that last for long periods of time. To get policy right, one needed to be able to forecast the future path of the economy, and economists are just not very good at doing this.
The economy, if left to its own devices, is generally stable. Central banks were more likely to get things wrong than they were to get things right, and so attempts to actively use monetary policy to stabilize the economy were instead likely to destabilize it.
The best thing the central bank could do was nothing, and so they should be made subject to rules that stopped them from trying to fine tune the economy. Instead, they should simply be made responsible for attaining a low and stable rate of growth in the money supply.
In this section, we begin by looking at central banking in a little more detail. We then turn to studying monetarism's basic tenets, and some of the evidence for Friedman's views on the importance of money. We then ask whether forecasting is indeed as difficult as claimed, and if so why.
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Review questions for this section can be found here.

Detailed Contents
1.  A crash course on money and banking
     The money supply.
     Central banking.
     Controlling the money supply.
     Open market transactions.
     Reserve requirement ratios.
     Discount window transactions.
     Some clarifications.
An introduction to monetary policy
Mminutes of the FOMC, November 6, 2001
   2.  Monetarism
     Main tenets of monetarism.
     Long and variable lags of monetary policy.
     Friedman on the Great Depression.
     Forecasting. Forecasting uncertainty
    The Lucas critique.
     The optimal money supply rule.
     Application: The Fed's monetarist experiment.
     Application: Thatcher's monetarist experiment.
     The death of monetarism? What remains of monetarism?