The Remarkably Similar Growth of the 'Cambridge K' Across Countries
7 Pages Posted: 20 Mar 2015
Date Written: November 28, 2013
Abstract
Empirical work on the quantity theory of money (QTM) has involved regressions based on the equation of exchange (EE). For the EE to be more than a definitional identity, an assumption must be made regarding its parameter, either Fisher's velocity 'v', or its inverse, the Cambridge 'k'. The assumption (almost) universally made is that the parameter is a constant. Under this assumption, the QTM was strongly confirmed for episodes of strong inflation, but much less so for episodes of medium or low inflation. In his famous rule of an expansion of the money supply at constant rate that should yield essentially zero inflation, Milton Friedman took into account his finding for the US that velocity follows a secular trend. We provide corroborative evidence for this finding based on a large sample of countries: k grows secularly by about 2 percent p.a. on average, and this is true for both low- and high-inflation countries.
Keywords: quantity theory of money, equation of exchange, inflation, monetary policy
JEL Classification: E3, E41, E51, E59
Suggested Citation: Suggested Citation