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Monetary policies and low-frequency manifestations of the quantity theory

Author

Listed:
  • Sargent, Thomas

    () (New York University)

  • Surico, Paolo

    () (Monetary Policy Committee Unit, Bank of England)

Abstract

To detect the quantity theory of money, we follow Lucas (1980) by looking at scatter plots of filtered time series of inflation and money growth rates and interest rates and money growth rates. Like Whiteman (1984), we relate those scatter plots to sums of two-sided distributed lag coefficients constructed from fixed-coefficient and time-varying VARs for US data from 1900-2005. We interpret outcomes in terms of population values of those sums of coefficients implied by two DSGE models. The DSGE models make the sums of coefficients depend on the monetary policy rule via cross-equation restrictions of a type that Lucas (1972) and Sargent (1971) emphasised in the context of testing the natural unemployment rate hypothesis. When the US data are extended beyond Lucas's 1955-75 period, the scatter plots mutate in ways that we attribute to prevailing monetary policy rules.

Suggested Citation

  • Sargent, Thomas & Surico, Paolo, 2008. "Monetary policies and low-frequency manifestations of the quantity theory," Discussion Papers 26, Monetary Policy Committee Unit, Bank of England.
    • Handle: RePEc:mpc:wpaper:0026
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    References listed on IDEAS

    as
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    Cited by:

    1. Ceri Davies & Max Gillman & Michal Kejak, 2012. "Deriving the Taylor Principle when the Central Bank Supplies Money," IEHAS Discussion Papers 1225, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
    2. McCallum, Bennett T. & Nelson, Edward, 2010. "Money and Inflation: Some Critical Issues," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 3, pages 97-153 Elsevier.
    3. Benati, Luca, 2009. "Long run evidence on money growth and inflation," Working Paper Series 1027, European Central Bank.
    4. Amisano, Gianni & Fagan, Gabriel, 2013. "Money growth and inflation: A regime switching approach," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 118-145.
    5. Jiang, Chun & Chang, Tsangyao & Li, Xiao-Lin, 2015. "Money growth and inflation in China: New evidence from a wavelet analysis," International Review of Economics & Finance, Elsevier, vol. 35(C), pages 249-261.
    6. António Rua, 2011. "Money growth and inflation in the euro area: a time-frequency view," Working Papers w201122, Banco de Portugal, Economics and Research Department.
    7. James H. Stock & Mark W. Watson, 2010. "Modeling inflation after the crisis," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 173-220.
    8. Ashima Goyal & Abhishek Kumar, 2018. "Money and business cycle: Evidence from India," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2018-020, Indira Gandhi Institute of Development Research, Mumbai, India.
    9. Alfred A. Haug & William G. Dewald, 2012. "Money, Output, And Inflation In The Longer Term: Major Industrial Countries, 1880–2001," Economic Inquiry, Western Economic Association International, vol. 50(3), pages 773-787, July.

    More about this item

    Keywords

    Quantity theory; policy regimes; time-varying VAR;

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative

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