Working Paper: NBER ID: w16393
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: Quantity Theory of Money; Inflation; Monetary Policy
JEL Codes: E31; E41; E51; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| average inflation (E31) | money growth (O42) |
| money growth (O42) | average inflation (E31) |
| output growth (O40) | average inflation (E31) |
| interest rates (E43) | average inflation (E31) |
| money growth + output growth + interest rates (O42) | average inflation (E31) |
| post-1990 sample (C83) | elasticity of money demand (E41) |
| inflation targeting by central banks (E52) | applicability of quantity theory of money (E41) |