Is Quantity Theory Still Alive?

23 Pages Posted: 7 Mar 2016

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

João Valle e Azevedo

Vrije Universiteit Amsterdam, School of Business and Economics

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Date Written: March 2016

Abstract

This article 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 the theories of Baumol–Tobin and Miller–Orr. Finally, a subsample characterised by the adoption of inflation targeting shows considerably less inflation variability, worsening the fit of a one‐for‐one relationship between money growth and inflation.

Suggested Citation

Teles, Pedro and Uhlig, Harald and Valle e Azevedo, João, Is Quantity Theory Still Alive? (March 2016). The Economic Journal, Vol. 126, Issue 591, pp. 442-464, 2016, Available at SSRN: https://ssrn.com/abstract=2742970 or http://dx.doi.org/10.1111/ecoj.12336

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

João Valle e Azevedo

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

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