Definition of Monetarism: The view that monetary policy is a prime source of the business cycle, and that the time path of the money stock is a good index of monetary policy. As presented by Milton Friedman and Anna Schwartz, monetarism emphasizes the relation between the level of the money stock and the level of output without a detailed theory of why changes in the money stock are not neutral in the short run. Later versions posed an explicit basis for noneutrality in the form of barriers to information flow about prices.

In policy terms monetarists, notably Friedman, advocated a monetary rule, that is, a steady growth in the money supply to match economic growth, without allowing central banks room for discretion. If the rule is credible, public expectations of inflation be low, and thus inflation itself, if high, would fall almost immediately. (Econterms)

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