NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Is Quantity Theory Still Alive?

Pedro Teles, Harald Uhlig

NBER Working Paper No. 16393
Issued in September 2010
NBER Program(s):   EFG   IFM   ME

This paper investigates whether the quantity theory of money is still alive. We demonstrate three insights. First, for countries with low inflation, the raw relationship between average inflation and the growth rate of money is tenuous at best. Second, the fit markedly improves, when correcting for variation in output growth and the opportunity cost of money, using elasticities implied by theories of Baumol-Tobin and Miller-Orr. Finally, the sample after 1990 shows considerably less inflation variability, worsening the fit of a one-for-one relationship between money growth and inflation, and generates a fairly low elasticity of money demand.

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This paper was revised on August 19, 2013

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Document Object Identifier (DOI): 10.3386/w16393

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