Sir Alan Walters, the monetary theorist who was knighted for his services as Margaret Thatcher's economics guru but ultimately helped to hasten her political demise, has died at the age of 82.

Sir Alan died peacefully at home on Saturday after being taken ill a couple of weeks ago, according to his wife, Paddie.

As an economist, Walters had argued from as early as the 1960s that Britain should keep to strict monetary targets and that policymakers would have to keep a much stricter control on the total amount of money circulating in the economy if they wanted to curb inflation.

It was a view that became fashionable on the Right during the steep inflation of the 1970s during which time Walters developed close ties with Tory frontbenchers. In 1981 he was called back from his job as a professor at the John Hopkins University in Baltimore to become Mrs Thatcher's personal economics adviser.

In that role he helped Sir Geoffrey Howe, the Chancellor of the Exchequer, persuade Mrs Thatcher to take one of her biggest gambles with the 1981 Budget, which overturned Keynesian orthodoxy by raising taxes in the middle of a severe recession.

No less than 364 leading economists wrote to The Times questioning the Government's policies after the Budget speech - "the time has come to reject monetarist policies," they declared - but in the event, the 1981 Budget was credited with laying the path for the sustained economic growth of the 1990s.

Sir Alan received a knighthood, and in 1983 returned to the United States to a former position as economic adviser to the World Bank, as well as taking a fellowship in a Washington think-tank.

He continued to give Mrs Thatcher informal advice, and agreed to return to No 10 on a full-time basis in May 1989. His second stint in Downing Street lasted just five months after he found himself in conflict with the then-Chancellor, Nigel Lawson.

Mr Lawson was infuriated by Sir Alan's willingness publicly to question Treasury policy, undermining his own position. In particular, the City took Sir Alan's aversion to a fixed exchange rate regime as meaning that Mrs Thatcher herself disagreed with her long-serving Chancellor over whether the UK should enter the Exchange Rate Mechanism.

In October 1989, Sir Alan was quoted - from a piece written before his return to Downing Street - as calling the ERM "half-baked", prompting Lawson to demand his dismissal.

The row produced one of Mrs Thatcher's most memorable quotes, when she was asked by Neil Kinnock, the Opposition Leader, at Prime Minister's Questions whether she was going to get rid of her part-time Chancellor. "Advisers advise, ministers decide," she replied.

Within hours she had lost both her adviser and her minister. After six years in the job, Mr Lawson walked out because the Prime Minister would not back him. Sir Alan submitted his resignation that night by telephone from his home in Washington.

Mrs Thatcher herself, fatally damaged by the row, was forced out office 13 months later.

After her departure, Sir Alan became Vice-Chairman of AIG Trading, the trading and market-making arm of the US insurance giant. He remained in the news for his opposition to the "consensus" politics of John Major, Mrs Thatcher's successor, and to the creation of the single European currency. In 1997 he was a parliamentary candidate for Sir James Goldsmith's Referendum party.

In recent times Sir Alan had been suffering from Parkinson's disease. He and his wife celebrated their 33rd wedding anniversary on December 27.

Times Recommends

• Oh no, Mr Darling: you have failed
• BBC survives dogfight over Kennel Club expose
• Where the Rosetta belongs can’t be set in stone