Monetarism is the view that the money supply is the central force shaping the economy. Significant changes in the money supply drive, with a lag, asset prices and nominal GDP, which is composed of the real rate of growth and the inflation rate. Professor Steve H. Hanke has spent decades applying monetarist principles to real-world policy, developing tools such as Hanke’s Golden Growth Rate (a money supply growth rate that is consistent with a specified inflation target).
Stability Is Not an Accident
Money matters. When money grows too fast, inflation follows. In extreme cases it leads to hyperinflation (where inflation exceeds 50% per month).
What Is Monetarism?
Monetarism is a doctrine which suggests that money has a major influence on both the level of economic activity and the price level, and that the objectives of monetary policy are best realised by targeting the rate of growth of money supply (Vaggi & Groenewegen, 2014). The contemporary intellectual tradition traces back to Milton Friedman and the Chicago school of economics.
The Key Equation: Quantity Theory of Money
The Quantity Theory of Money is summarized in the following equation of exchange:
Variable | Meaning |
M | Money Supply |
V | Velocity of Money (the number of times, per unit of time, that money is used to purchase goods or services in an economy—the “turnover rate” of money) |
P | Price Level |
Y | Real GDP (national income) |
Learn more about the Quantity Theory of Money
Hanke's Golden Growth Rate
It is important to remember that the Quantity Theory of Money is an identity: The left-hand side of the equation, MV, is the total amount of money spent in an economy, while the right-hand side, PY, is the total income received in an economy. By definition, they must be equal.
Therefore, we can analyze short-term percentage changes, we convert the quantity equation into the following differential equation:
If a country sets an inflation target, we can determine a growth rate in the money supply that is consistent with hitting the inflation target.
Variable | Meaning |
%ΔP | Inflation target |
%ΔY | Long-run average real GDP growth |
%ΔV | Long-run average change in money velocity |
Learn more about the derivation of Hanke's Golden Growth Rate
How Money Growth Translates into Inflation
Changes in the money supply do not affect the economy immediately. They work through long and variable lags:
- First (1-9 months): Excess money shows up in asset prices
- Next (6-18 months): Economic activity begins to accelerate
- Finally (12-24 months): Inflation appears in goods and services
This lag structure explains why rapid money growth often looks harmless at first and why inflation catches policymakers by surprise.
Hanke's Golden Growth Rate in Practice
The Golden Growth Rate is not theoretical. Professor Hanke has applied it repeatedly across countries and crises to anticipate inflation, identify policy mistakes, and evaluate monetary institutions.
Anticipating Inflation
When money growth persistently exceeds its golden benchmark, higher inflation follows with a lag.
In 2021, when the Federal Reserve insisted that COVID-era inflation was "transitory," Professor Hanke and Professor Greenwood, in their monetarist critique of team transitory, used the Quantity Theory of Money to predict that more inflation was in the pipeline and would peak at as high as 9%/yr. As it turns out, they hit the target. In June 2022, U.S. inflation peaked at 9.1%/yr — the highest in 40 years. That’s because the money supply peaked at 26.68%/yr in February of 2021, the highest rate since the founding of the Federal Reserve in 1913. By employing the Quantity Theory of Money, Hanke and Greenwood were able to accurately predict, with a 12-24 month lag, the oncoming inflation storm.
Their work is published in the Wall Street Journal op-ed and as a peer reviewed work in the Journal of Applied Corporate Finance:
Read about Hanke's analysis: Business Insider, Nov 2024
Diagnosing Policy Mistakes
Deviations below the Golden Growth Rate can be just as damaging as overshoots. Policies that drive money growth sharply below its golden growth path risk turning slowdowns into deeper and longer recessions. A prime example is Japan, where the growth of broad money has been exceptionally anemic since its economic bubble burst in 1990–1991. This has resulted in what has been referred to in Japan as the Lost Decades.
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Related Topics
- Hyperinflation — What happens when money growth spirals out of control
- Currency Boards — Institutional design for monetary discipline
- Dollarization — Replacing a failed currency with a stable one
- Free Market Economics — The broader framework
Recent Publications (2025–2026)
- Making Money Work — Book, Wiley
- Alternative Operating Model for the Fed — Journal Article, The International Economy
- Why Economists Were Wrong About Inflation — Working Paper, Johns Hopkins IAE
- FT Letter: Inequality & Money Supply — Letter, Financial Times
- Book Review: Quantity Theory of Money — Book Review, The Daily Economy
- Inflation Won't Come from Oil — Op-ed, Fortune Magazine