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Hence, in the above quotation, expansions in the money stock or money supply
are proportionally associated to prices and vice versa. Further, it has been claimed
that “inflation is always and everywhere a monetary phenomenon.
It is in this
sense that monetarism alerts that any inflationary economic disturbance has an
exclusive origin in monetary fluctuations. As for the extent of this proposition,
Friedman (1956) concedes that: “The quantity theory of money is a term evocative
of a general approach, rather than a label for a well-defined theory.”
New classical economics is persuaded about both the long and short-term
neutrality
This includes what they call the real business cycle theory. For
instance, “Early studies found that monetary shocks pushed through this channel
could account at best for a minor fraction of the variance of output in post-war U.S.
cycles. This failure led to a second round of attempts to find a
direct
empirical role
for monetary shocks, …. Barro and Mishkin attained results that eventually gave
courage to the subscribers of the real business cycle theory to neglect
all
monetary
and price level disturbances.”
That is to say, new classical economics and the real
business cycle theory does not envisage any changes in the real economy on
account of price fluctuations or monetary variables.
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“8. It follows from the propositions I have so far stated that
inflation is always and
everywhere a monetary phenomenon
in the sense that it is and can be produced
only by a more rapid increase in the quantity of money than in output.” Friedman
(1970), emphasis in the original.
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“Old classical economists, such as David Hume, asserted that money was neutral
in the long run but not in the short run. This is exactly the position held by new
Keynesians. By contrast, new classical economists claim that money is neutral
even in the short run. In advocating this position, they take the classical dichotomy
more seriously than did the classical economists themselves.” Mankiw (1992).
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Sargent (1996).