Is Quantity Theory Still Alive?

31 Pages Posted: 8 Nov 2013

See all articles by Pedro Teles

Pedro Teles

Federal Reserve Bank of Chicago; Centre for Economic Policy Research (CEPR)

Harald Uhlig

University of Chicago - Department of Economics

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Date Written: October 30, 2013

Abstract

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.

Keywords: quantity theory, money demand, money demand elasticity, inflation targeting

JEL Classification: E31, E41, E42, E50

Suggested Citation

Teles, Pedro and Uhlig, Harald, Is Quantity Theory Still Alive? (October 30, 2013). ECB Working Paper No. 1605, Available at SSRN: https://ssrn.com/abstract=2347444

Pedro Teles (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
312-322-2947 (Phone)
312-322-2357 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Harald Uhlig

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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