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Is Quantity Theory Still Alive?

  • Pedro Teles
  • Harald Uhlig

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.

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File URL: http://www.nber.org/papers/w16393.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16393.

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Date of creation: Sep 2010
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Handle: RePEc:nbr:nberwo:16393
Note: EFG IFM ME
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  1. 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.
  2. Coenen, Günter & Vega, Juan Luis, 1999. "The demand for M3 in the euro area," Working Paper Series 0006, European Central Bank.
  3. Orazio Attanasio & Luigi Guiso & Tuillo Jappelli, 1998. "The Demand for Money, Financial Innovation, and the Welfare Cost of Inflation: An Analysis with Household Data," NBER Working Papers 6593, National Bureau of Economic Research, Inc.
  4. 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.
  5. Assenmacher-Wesche, Katrin & Gerlach, Stefan, 2006. "Money at Low Frequencies," CEPR Discussion Papers 5868, C.E.P.R. Discussion Papers.
  6. 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.
  7. 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.
  8. 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.
  9. Ball, Laurence, 2001. "Another look at long-run money demand," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 31-44, February.
  10. Dutta, Jayasri & Kapur, Sandeep, 1998. "Liquidity Preference and Financial Intermediation," Review of Economic Studies, Wiley Blackwell, vol. 65(3), pages 551-72, July.
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