Is Quantity Theory Still Alive?
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.
Uhlig's research has been supported by the NSF grant SES-0922550 and by a Wim Duisenberg fellowship at the ECB. Teles gratefully acknowledges the financial support of FCT. Uhlig has an ongoing consulting relationship with a Federal Reserve Bank, the Bundesbank and the ECB. The views here are entirely our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Pedro Teles & Harald Uhlig & João Valle e Azevedo, 2016. "Is Quantity Theory Still Alive?," The Economic Journal, vol 126(591), pages 442-464. citation courtesy of