Discretionary policy in the context of "Stabilization policy"

Monetarism is a school of thought in monetary economics that emphasizes the role of policy-makers in controlling the amount of money in circulation. It gained prominence in the 1970s, but was mostly abandoned as a direct guidance to monetary policy during the following decade because of the rise of inflation targeting through movements of the official interest rate.

The monetarist theory states that variations in the money supply have major influences on national output in the short run and on price levels over longer periods. Monetarists assert that the objectives of monetary policy are best met by targeting the growth rate of the money supply rather than by engaging in discretionary monetary policy. Monetarism is commonly associated with neoliberalism.

A nominal income target is a monetary policy target. Such targets are adopted by central banks to manage national economic activity. Nominal aggregates are not adjusted for inflation. Nominal income aggregates that can serve as targets include nominal gross domestic product (NGDP) and nominal gross domestic income (GDI). Central banks use a variety of techniques to hit their targets, including conventional tools such as interest rate targeting or open market operations, unconventional tools such as quantitative easing or interest rates on excess reserves and expectations management to hit its target. The concept of NGDP targeting was formally proposed by neo-Keynesian economists James Meade in 1977 and James Tobin in 1980, although Austrian School economist Friedrich Hayek argued in favor of the stabilization of nominal income as a monetary policy norm as early as 1931 and as late as 1975.

The concept was resuscitated and popularized in the wake of the 2008 financial crash by a group of economists (most notably Scott Sumner) whose views came to be known as market monetarism. They claimed that the crisis would have been far less severe had central banks adopted some form of nominal income targeting.

James Tobin (March 5, 1918 – March 11, 2002) was an American economist who served on the Council of Economic Advisers and consulted with the Board of Governors of the Federal Reserve System, and taught at Yale University. He contributed to the development of key ideas in the Keynesian economics of his generation and advocated government intervention in particular to stabilize output and avoid recessions. His academic work included pioneering contributions to the study of investment, monetary and fiscal policy and financial markets. He also proposed an econometric model for censored dependent variables, the well-known tobit model.

Along with fellow neo-Keynesian economist James Meade in 1977, Tobin proposed nominal GDP targeting as a monetary policy rule in 1980. Tobin received the Nobel Memorial Prize in Economic Sciences in 1981 for "creative and extensive work on the analysis of financial markets and their relations to expenditure decisions, employment, production and prices."