Why do classical or monetarist schools of economic thought maintain that monetary stimulus is doomed to be ineffective in the long run?

Answer 1

I think that you meant "fiscal stimulus" because this is what the monetarists oppose. Monetarists hold that the doctrine of monetary neutrality fixes long-run aggregate supply. On a graph, the long-run aggregate supply appears as a vertical line and is influenced only by real variables such as the natural rate of employment, resource base, technology, etc. A fiscal stimulus acts on the short-run aggregate demand by temporarily pushing the economy above its real potential through the use of government spending and the multiplier effect (1/1-Marginal Propensity to Consume).

Monetarists oppose such actions for a number of reasons. First, when the government has to finance a large fiscal stimulus and does not raise taxes, bigger budget deficits occur, which negatively impacts public saving. As such, aggregate supply in the loanable funds market falls and "crowds out" investment by raising the equilibrium interest rate and decreases the amount of available funds. This effect also dampers the strength of the multiplier effect on aggregad

Also, the economy is only temporarily pushed above potential. In the long-run, only inflation will result from the stimulus.

Other concerns Monetarists have include the issue of lags, especially the implementation lag. By the time a stimulus passes and is put into action, the economy might already reach its trough and start expanding. If fiscal policy is introduced at the wrong time, there are serious inflation risks.