ABSTRACT
This chapter discusses the different views of monetary policy. It presents a number of theoretical controversies and focuses on the arguments over what should have been done in the financial crisis of 2008. Keynesians believed that the federal government should focus on fiscal policy rather than monetary policy. They argued that fiscal policy directly alters demand, whereas monetary policy has an indirect and much weaker impact on the economy. The monetarists distinguished between discretionary monetary policy and fixed monetary rules. Discretionary monetary policy refers to the attempt by the Fed to change the rate of growth in the supply of money to fit the economic situation at hand. The founder of monetarism was Milton Friedman. The Fed was therefore very aggressive in going well beyond the traditional monetary policy tools in attempting to end the crisis and secure a strong recovery. Monetary policy is much more effective when fighting inflation than in stimulating recovery from a recession.
