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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

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, John Wiley & Sons, vol. 71(3), pages 661-667, January.
    • Handle: RePEc:wly:soecon:v:71:y:2005:i:3:p:661-667
    DOI: 10.1002/j.2325-8012.2005.tb00665.x
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    References listed on IDEAS

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    Cited by:

    1. Cheng-Wen Lee & Andrian Dolfriandra Huruta, 2021. "Reexamining The Quantity Theory Of Money: An Empirical Analysis From The Joint Hypothesis," Economic Review: Journal of Economics and Business, University of Tuzla, Faculty of Economics, vol. 19(1), pages 3-12, May.

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