ABSTRACT
This chapter focuses on the contributions made by both monetarism and supply-side economics to the debate over the way in which monetary and fiscal policy ought to be designed. It concentrates essentially on three schools of thought. The first and most important is Friedman's brand of monetarism. The second is the neo-classical school. The third is supply-side economics. First, supply-side economists attach tremendous importance, in the design of policy, to correcting 'supply-side' weaknesses: improving incentives to work, save, invest, innovate and assume risk. The disagreement has to be grounded on a rejection either of rational expectations as defined by the neo-classical school or of the assumption of continuous market clearing or of both. Monetarists tend to think in terms of a 'target rate of inflation at which policy should aim. Monetarism the author holds strong views both about the real effectiveness of fiscal policy, given the money supply, and also about the use of discretionary fiscal policy for stabilization.
