Editing Monetarism (section)

==Decline==

Monetarist ascendancy was brief, however.<ref name=IMF>{{cite journal |last1=Jahan |first1=Sarwat |last2=Papageorgiou |first2=Chris |title=Back to Basics What Is Monetarism?: Its emphasis on money's importance gained sway in the 1970s |journal=Finance & Development |date=28 February 2014 |volume=51 |issue=1 |doi=10.5089/9781484312025.022.A012 |doi-broken-date=1 November 2024 |url=https://www.elibrary.imf.org/view/journals/022/0051/001/article-A012-en.xml |access-date=16 October 2023 |language=en}}</ref> The period when major central banks focused on targeting the growth of money supply, reflecting monetarist theory, lasted only for a few years, in the US from 1979 to 1982.<ref>{{cite book |last1=Mattos |first1=Olivia Bullio |title=Handbook of Economic Stagnation |date=1 January 2022 |publisher=Academic Press |isbn=978-0-12-815898-2 |pages=341–359 |chapter-url=https://www.sciencedirect.com/science/article/abs/pii/B9780128158982000069 |access-date=16 October 2023 |chapter=Chapter Seventeen - Monetary policy after the subprime crisis: a Post-Keynesian critique}}</ref> 

The money supply is useful as a policy target only if the relationship between money and nominal GDP, and therefore inflation, is stable and predictable. This implies that the velocity of money must be predictable. In the 1970s velocity had seemed to increase at a fairly constant rate, but in the 1980s and 1990s velocity became highly unstable, experiencing unpredictable periods of increases and declines. Consequently, the stable correlation between the money supply and nominal GDP broke down, and the usefulness of the monetarist approach came into question. Many economists who had been convinced by monetarism in the 1970s abandoned the approach after this experience.<ref name=IMF/> 

The changing velocity originated in shifts in the [[demand for money]] and created serious problems for the central banks. This provoked a thorough rethinking of monetary policy. In the early 1990s central banks started focusing on targeting inflation directly using the short-run [[interest rate]] as their central policy variable, abandoning earlier emphasis on money growth. The new strategy proved successful, and today most major central banks follow a flexible [[inflation targeting]].<ref name=Blanchard/>{{rp|483-485}}