Working Paper: CEPR ID: DP8049
Authors: Pedro Teles; Harald Uhlig
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: inflation targeting; money demand; money demand elasticity; quantity theory
JEL Codes: E31; E41; E42; E50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| money growth (O42) | inflation (E31) |
| output growth (O40) | money growth (O42) |
| opportunity cost of money (E41) | money growth (O42) |
| inflation variability (E31) | money growth (O42) |
| inflation targeting (E31) | elasticity of money demand (E41) |