Controlling inflation

The understanding of Milton Friedman on how to control inflation put to test the ideas of other economics about the importance of fiscal policy. The fiscal policy failed to find a solution for the recurrent inflation in the economies and as it focused on influencing taxation and government spending and hence, the market demand (Heilbroner, and William,53). The fiscal policy failed to provide clear theoretical vision on how to solve inflation in the market amidst efforts by central banks to control inflation rate.

The monetary policy idea proposed Milton Friedman was more applicable and was pegged on reducing the growth rate of total spending. The monetary policy was, therefore, deemed to be more effective in influencing aggregate spending that the fiscal spending (Heilbroner, and William,53). The idea that a fiscal policy was not needed in backing up monetary policy since its accommodation by authorities in an attempt to finance budget deficit would lead to inflationary effects. The principal of monetary policy being used as a tool for effecting price stability was adopted by major economies as the framework for monetary policy. Policy makers had failed to understand the impact of monetary policy in control inflation in 1970’s (Nelson, 1).  The fiscal policy had the capacity to bring about budget deficits due to the tendency to overspend especially during recessions. On the other hand, the use of fiscal policy is seen to have strong re-emerged in 2008 recessions where governments used fiscal stimulus to spur aggregate demand. Despite the natural consequences of increased deficit due to borrowing, the central banks resulted to using fiscal policy to increase government, households and firms spending (Global Economic Prospects, 121).

References

Nelson, Edward. "Milton Friedman on inflation." Monetary Trends Jan (2007).

 

Heilbroner, Robert L, and William Milberg. The Crisis of Vision in Modern Economic Thought. Cambridge [u.a.: Cambridge Univ. Press, 1995. 52-53

Global Economic Prospects, January 2015: Having Fiscal Space and Using It. , 2015. Internet resource.121