IDEAS home Printed from https://ideas.repec.org/p/ecb/ecbwps/20131605.html
   My bibliography  Save this paper

Is quantity theory still alive?

Author

Listed:
  • Teles, Pedro
  • Uhlig, Harald

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. JEL Classification: E31, E41, E42, E50

Suggested Citation

  • Teles, Pedro & Uhlig, Harald, 2013. "Is quantity theory still alive?," Working Paper Series 1605, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20131605
    as

    Download full text from publisher

    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1605.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Peter N. Ireland, 2009. "On the Welfare Cost of Inflation and the Recent Behavior of Money Demand," American Economic Review, American Economic Association, vol. 99(3), pages 1040-1052, June.
    2. Benhabib, Jess & Schmitt-Grohe, Stephanie & Uribe, Martin, 2001. "The Perils of Taylor Rules," Journal of Economic Theory, Elsevier, vol. 96(1-2), pages 40-69, January.
    3. Merton H. Miller & Daniel Orr, 1966. "A Model of the Demand for Money by Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 80(3), pages 413-435.
    4. William Barnett & Apostolos Serletis & W. Erwin Diewert, 2005. "The Theory of Monetary Aggregation (book front matter)," Macroeconomics 0511008, University Library of Munich, Germany.
    5. G. Coenen & J.-L. Vega, 2001. "The demand for M3 in the euro area," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(6), pages 727-748.
    6. Goohoon Kwon & Wayne Robinson & Lavern McFarlane, 2006. "Public Debt, Money Supply, and Inflation: A Cross-Country Study and Its Application to Jamaica," IMF Working Papers 2006/121, International Monetary Fund.
    7. Orazio P. Attanasio & Luigi Guiso & Tullio Jappelli, 2002. "The Demand for Money, Financial Innovation, and the Welfare Cost of Inflation: An Analysis with Household Data," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 317-351, April.
    8. Robert E. Lucas, 2001. "Inflation and Welfare," International Economic Association Series, in: Axel Leijonhufvud (ed.), Monetary Theory as a Basis for Monetary Policy, chapter 4, pages 96-142, Palgrave Macmillan.
    9. Lucas, Robert E, Jr, 1996. "Nobel Lecture: Monetary Neutrality," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 661-682, August.
    10. Pedroni, Peter, 2004. "Panel Cointegration: Asymptotic And Finite Sample Properties Of Pooled Time Series Tests With An Application To The Ppp Hypothesis," Econometric Theory, Cambridge University Press, vol. 20(3), pages 597-625, June.
    11. Isabel Correia & Pedro Teles, 1999. "The Optimal Inflation Tax," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(2), pages 325-346, April.
    12. Kaddour Hadri, 2000. "Testing for stationarity in heterogeneous panel data," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 148-161.
    13. Carlson, John B. & Hoffman, Dennis L. & Keen, Benjamin D. & Rasche, Robert H., 2000. "Results of a study of the stability of cointegrating relations comprised of broad monetary aggregates," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 345-383, October.
    14. Benati, Luca, 2009. "Long run evidence on money growth and inflation," Working Paper Series 1027, European Central Bank.
    15. Lucas, Robert E, Jr, 1980. "Two Illustrations of the Quantity Theory of Money," American Economic Review, American Economic Association, vol. 70(5), pages 1005-1014, December.
    16. William J. Baumol, 1952. "The Transactions Demand for Cash: An Inventory Theoretic Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 66(4), pages 545-556.
    17. Michael Woodford, 2008. "How Important Is Money in the Conduct of Monetary Policy?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1561-1598, December.
    18. Ball, Laurence, 2001. "Another look at long-run money demand," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 31-44, February.
    19. Thomas J. Sargent & Paolo Surico, 2011. "Two Illustrations of the Quantity Theory of Money: Breakdowns and Revivals," American Economic Review, American Economic Association, vol. 101(1), pages 109-128, February.
    20. Fernando Alvarez & Francesco Lippi, 2009. "Financial Innovation and the Transactions Demand for Cash," Econometrica, Econometric Society, vol. 77(2), pages 363-402, March.
    21. Barnett, William A., 1980. "Economic monetary aggregates an application of index number and aggregation theory," Journal of Econometrics, Elsevier, vol. 14(1), pages 11-48, September.
    22. Kao, Chihwa, 1999. "Spurious regression and residual-based tests for cointegration in panel data," Journal of Econometrics, Elsevier, vol. 90(1), pages 1-44, May.
    23. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    24. Andrew Atkeson & Varadarajan V. Chari & Patrick J. Kehoe, 2010. "Sophisticated Monetary Policies," The Quarterly Journal of Economics, Oxford University Press, vol. 125(1), pages 47-89.
    25. Whiteman, Charles H, 1984. "Lucas on the Quantity Theory: Hypothesis Testing without Theory," American Economic Review, American Economic Association, vol. 74(4), pages 742-749, September.
    26. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(S1), pages 653-670, November.
    27. Maddala, G S & Wu, Shaowen, 1999. "A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-652, Special I.
    28. Peter C. B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Econometrica, Econometric Society, vol. 67(5), pages 1057-1112, September.
    29. Katrin Assenmacher-Wesche & Stefan Gerlach, 2007. "Money at Low Frequencies," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 534-542, 04-05.
    30. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
    31. Gill Hammond, 2012. "State of the art of inflation targeting," Handbooks, Centre for Central Banking Studies, Bank of England, edition 4, number 29, March.
    32. Nelson C. Mark & Donggyu Sul, 2003. "Cointegration Vector Estimation by Panel DOLS and Long‐run Money Demand," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(5), pages 655-680, December.
    33. Goohoon Kwon & Lavern McFarlane & Wayne Robinson, 2009. "Public Debt, Money Supply, and Inflation: A Cross-Country Study," IMF Staff Papers, Palgrave Macmillan, vol. 56(3), pages 476-515, August.
    34. Jayasri Dutta & Sandeep Kapur, 1998. "Liquidity Preference and Financial Intermediation," Review of Economic Studies, Oxford University Press, vol. 65(3), pages 551-572.
    35. Peter Pedroni, 2001. "Purchasing Power Parity Tests In Cointegrated Panels," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 727-731, November.
    36. Pedroni, Peter, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 653-670, Special I.
    37. Pedro Teles & Ruilin Zhou, 2005. "A stable money demand: Looking for the right monetary aggregate," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 29(Q I), pages 50-63.
    38. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Breitung, Jörg & Pesaran, Mohammad Hashem, 2005. "Unit roots and cointegration in panels," Discussion Paper Series 1: Economic Studies 2005,42, Deutsche Bundesbank.
    2. Acikgoz, Senay & Ben Ali, Mohamed Sami, 2019. "Where does economic growth in the Middle Eastern and North African countries come from?," The Quarterly Review of Economics and Finance, Elsevier, vol. 73(C), pages 172-183.
    3. Liu, Jingyang & Kool, Clemens J.M., 2018. "Money and credit overhang in the euro area," Economic Modelling, Elsevier, vol. 68(C), pages 622-633.
    4. Helmut Herwartz & Jordi Sardà & Bernd Theilen, 2016. "Money demand and the shadow economy: empirical evidence from OECD countries," Empirical Economics, Springer, vol. 50(4), pages 1627-1645, June.
    5. Kahia, Montassar & Ben Aïssa, Mohamed Safouane & Charfeddine, Lanouar, 2016. "Impact of renewable and non-renewable energy consumption on economic growth: New evidence from the MENA Net Oil Exporting Countries (NOECs)," Energy, Elsevier, vol. 116(P1), pages 102-115.
    6. Ouedraogo, Nadia S., 2013. "Energy consumption and human development: Evidence from a panel cointegration and error correction model," Energy, Elsevier, vol. 63(C), pages 28-41.
    7. Nagmi Moftah Aimer, 2020. "Renewable energy consumption, financial development and economic growth: Evidence from panel data for the Middle East and North African countries," Economics Bulletin, AccessEcon, vol. 40(3), pages 2058-2072.
    8. Mendoza, Miguel Ángel, 2014. "Panorama preliminar de los subsidios y los impuestos a las gasolinas y diésel en los países de América Latina," Documentos de Proyectos 641, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    9. Juan Carlos Aquino & N. R. Ramírez-Rondán, 2020. "Estimating factor shares from nonstationary panel data," Empirical Economics, Springer, vol. 58(5), pages 2353-2380, May.
    10. Emrah KOÇAK & Nısfet UZAY, 2018. "Democracy, Economic Freedoms and Economic Growth: An Investigation on the Role of Institutions," Sosyoekonomi Journal, Sosyoekonomi Society, issue 26(36).
    11. Fantazzini , Dean, 2009. "Econometric Analysis of Financial Data in Risk Management," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 14(2), pages 100-127.
    12. repec:ebl:ecbull:v:15:y:2008:i:4:p:1-15 is not listed on IDEAS
    13. Helmi Hamdi & Ali Said & Rashid Sbia, 2015. "Empirical Evidence on the Long-Run Money Demand Function in the Gulf Cooperation Council Countries," International Journal of Economics and Financial Issues, Econjournals, vol. 5(2), pages 603-612.
    14. Shigeyuki Hamori, 2008. "Empirical Analysis of the Money Demand Function in Sub-Saharan Africa," Economics Bulletin, AccessEcon, vol. 15(4), pages 1-15.
    15. Ajide, Kazeem & Ridwan, Ibrahim, 2018. "Energy consumption, environmental contaminants, and economic growth: The G8 experience," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 51, pages 58-83.
    16. Kahia, Montassar & Aïssa, Mohamed Safouane Ben & Lanouar, Charfeddine, 2017. "Renewable and non-renewable energy use - economic growth nexus: The case of MENA Net Oil Importing Countries," Renewable and Sustainable Energy Reviews, Elsevier, vol. 71(C), pages 127-140.
    17. Ana G. Bus y José L. Nicolini-Llosa, 2015. "La renta diferencial agrícola en Argentina en 1986-2008, con datos de panel y co-integración," Económica, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata, vol. 61, pages 53-79, January-D.
    18. Lee Chien-Chiang, 2011. "Does Insurance Matter for Growth: Empirical Evidence from OECD Countries," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-28, June.
    19. Ouedraogo, Nadia S., 2013. "Energy consumption and economic growth: Evidence from the economic community of West African States (ECOWAS)," Energy Economics, Elsevier, vol. 36(C), pages 637-647.
    20. Alessandro Bellocchi & Edgar J. Sanchez Carrera & Giuseppe Travaglini, 2021. "What drives TFP long-run dynamics in five large European economies?," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 38(2), pages 569-595, July.
    21. Hasan Gökhan Doğan & Arzu Kan, 2019. "The effect of precipitation and temperature on wheat yield in Turkey: a panel FMOLS and panel VECM approach," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 21(1), pages 447-460, February.

    More about this item

    Keywords

    inflation targeting; money demand; money demand elasticity; quantity theory;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:20131605. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/emieude.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Official Publications (email available below). General contact details of provider: https://edirc.repec.org/data/emieude.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.