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Is quantity theory still alive?

  • Teles, Pedro
  • Uhlig, Harald

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

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Paper provided by European Central Bank in its series Working Paper Series with number 1605.

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Date of creation: Nov 2013
Date of revision:
Handle: RePEc:ecb:ecbwps:20131605
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  1. Orazio Attanasio & Luigi Guiso & Tullio Jappelli, 1998. "The Demand for Money, Financial Innovation, and the Welfare Cost of Inflation: An Analysis with Households' Data," CSEF Working Papers 03, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  2. Laurence Ball, 1998. "Another Look at Long-Run Money Demand," NBER Working Papers 6597, National Bureau of Economic Research, Inc.
  3. Goohoon Kwon & Lavern McFarlane & Wayne Robinson, 2006. "Public Debt, Money Supply, and Inflation: A Cross-Country Study and Its Application to Jamaica," IMF Working Papers 06/121, International Monetary Fund.
  4. Coenen, Günter & Vega, Juan Luis, 1999. "The demand for M3 in the euro area," Working Paper Series 0006, European Central Bank.
  5. Isabel Correia & Pedro Teles, 1997. "The optimal inflation tax," Discussion Paper / Institute for Empirical Macroeconomics 123, Federal Reserve Bank of Minneapolis.
  6. John B. Carlson & Dennis L. Hoffman & Benjamin D. Keen & Robert H. Rasche, 1999. "Results of a study of the stability of cointegrating relations comprised of broad monetary aggregates," Working Paper 9917, Federal Reserve Bank of Cleveland.
  7. Assenmacher-Wesche, Katrin & Gerlach, Stefan, 2006. "Money at Low Frequencies," CEPR Discussion Papers 5868, C.E.P.R. Discussion Papers.
  8. Pedro Teles & Ruilin Zhou, 2005. "A stable money demand: Looking for the right monetary aggregate," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 50-63.
  9. Dutta, Jayasri & Kapur, Sandeep, 1998. "Liquidity Preference and Financial Intermediation," Review of Economic Studies, Wiley Blackwell, vol. 65(3), pages 551-72, July.
  10. 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.
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