Monetarism is a school of thought in which its members share the view that fluctuations in economic activity are largely governed by fluctuations in the stock of money. While it is broad enough to accommodate disagreements within its ranks with regard to the extent of the influence money has on economic activity, or even the appropriate definition of money that best satisfies the main proposition, the common factor that binds all of the members of this school of thought is the belief that ultimately inflation is caused by excess growth in the money supply. This latter view derives from the 'quantity theory of money'. In its simplest form, it is asserted that a relationship exists between the level of national income (measured in current prices) and the stock of money. Consequently the rate of growth of national income (gross national and domestic product (GNP and GDP), etc.) will be strongly correlated with the rate of growth of the stock of money. If it is additionally asserted that in the long run the real value of national income (national income adjusted for the general price level) grows at a stable rate, then the rate of growth of money in excess of the rate of growth of real national income will result in inflation. In other words, an increase in the money supply will at first benefit economic activity by raising the level of income but over the long period, as real income reverts to its historic rate of growth, the result is inflation. This view is encapsulated in the phrase: 'inflation is caused by too much money chasing too few goods'.

Monetarism has gone through several incarnations. It has a long historical pedigree that strongly influenced pre-Keynesian economic thought. The influence of the monetarist school waned with the development of Keynesian economics. The label 'monetarism' came even later - a term that was invented in the 1960s. It was Milton Friedman who in the 1950s restated the quantity theory as a theory of the demand for money. Monetarism became influential in the late 1960s and the 1970s, when inflation in the developed countries rose to double digit figures. The British monetarist experiment of the 1980s was the closest that any economy has come to following a monetarist macroeconomic policy. Whether the experiment was a success or not is a topic for future historians. However, a key policy recommendation of monetarism is that low monetary growth is a necessary condition for low inflation. Monetary targets have been developed in many developed economies with this aim in mind. The history of monetary targeting has been mixed, but where it has been successful, as in Germany, the result has been a stable monetary environment and low inflation.