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Money Growth, Output Growth, and Inflation: A Reexamination of the Modern Quantity Theory's Linchpin Prediction

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  • Harold J. Brumm

    () (U.S. General Accounting Office)

Abstract

A testable implication of the modern quantity theory of money, when viewed as a theory of inflation, is the joint hypothesis that (i) there is a one-to-one positive relationship between inflation and the money stock growth rate, (ii) there is a one-to-one negative relationship between inflation and the aggregate output growth rate, and (iii) there are no other determinants of inflation besides the money stock and aggregate output expansion rates. This implication is the theory's linchpin prediction. A recent prior study published in this journal examines cross-country data and reports that this hypothesis cannot be rejected. The present study reexamines the prior study's data and finds that the joint hypothesis is decisively rejected, an unpleasant finding from a monetarist perspective. The article then goes on to propose an alternative to the prior study's model of the inflation process and reports findings that are, from the perspective of a monetarist, at least mildly pleasant.

Suggested Citation

  • Harold J. Brumm, 2005. "Money Growth, Output Growth, and Inflation: A Reexamination of the Modern Quantity Theory's Linchpin Prediction," Southern Economic Journal, Southern Economic Association, vol. 71(3), pages 661-667, January.
  • Handle: RePEc:sej:ancoec:v:71:3:y:2005:p:661-667
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    Cited by:

    1. Claude Hillinger & Bernd Süßmuth, 2010. "The Quantity Theory of Money: An Assessment of its Real Linchpin Prediction," CESifo Working Paper Series 2995, CESifo Group Munich.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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