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The Quantity Theory of Money and Friedmanian Monetary Policy: An Empirical Investigation

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  • Claude Hillinger
  • Bernd Süssmuth
  • Marco Sunder

Abstract

We introduce an approach for the empirical study of the quantity theory of money (QTM) that is novel both with respect to the specific steps taken as well as the general methodology employed. Empirical studies of the QTM have focused directly on the relationship between the rate of change of the money stock and inflation. We believe that this is an inferior starting point for several reasons and focus instead on the Cambridge form of the QTM. We find that the coefficient k fluctuates strongly in the short run, but has a low and steady rate of change in the long run, which makes the QTM a useful instrument for the long-run control of inflation. An important finding that contradicts all of the previous literature is that the QTM holds for low inflation as well as for high inflation. We discuss how our findings relate to monetarism generally and propose an adaption of McCallum’s rule for a Friedmanian monetary policy.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3754.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3754

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Related research

Keywords: Cambridge equation; Friedman’s k rule; monetarism; quantity theory;

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References

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  1. Hillinger, Claude, 2008. "Measuring Real Value and Inflation," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 2(20), pages 1-26.
  2. Pedro Teles & Harald Uhlig, 2010. "Is Quantity Theory Still Alive?," NBER Working Papers 16393, National Bureau of Economic Research, Inc.
  3. Gerald P. Dwyer, Jr. & R.W. Hafer, 1999. "Are money growth and inflation still related?," Economic Review, Federal Reserve Bank of Atlanta, Federal Reserve Bank of Atlanta, issue Q2, pages 32-43.
  4. Arturo Estrella & Frederic S. Mishkin, 1996. "Is There a Role for Monetary Aggregates in the Conduct of Monetary Policy?," NBER Working Papers 5845, National Bureau of Economic Research, Inc.
  5. Lucas, Robert E, Jr, 1980. "Two Illustrations of the Quantity Theory of Money," American Economic Review, American Economic Association, American Economic Association, vol. 70(5), pages 1005-14, December.
  6. Hoffmann, Andreas & Schnabl, Gunther, 2009. "A Vicious Cycle of Manias, Crashes and Asymmetric Policy Responses - An Overinvestment View," MPRA Paper 18532, University Library of Munich, Germany.
  7. Gerald P. Dwyer & R.W. Hafer, 1988. "Is money irrelevant?," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue May, pages 3-17.
  8. Christopher A. Sims, 2010. "But Economics Is Not an Experimental Science," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 24(2), pages 59-68, Spring.
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