The quantity theory of money, 1870-2020
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Alexander JungThe quantity theory of money,
1870-2020No 2940
Disclaimer: This paper should not be reported as representing the views of the European Central Bank
(ECB). - Abstract
This study re-assesses the validity of the quantity theory of money (QTM) for the very long sample,
1870 to 2020, for 18 industrial countries using the dataset from Jord? et al. - ECB Working Paper Series No 2940
1
Non-technical summary
The quantity theory of money (QTM) is a central tenet of monetary economics. - Second, panel regressions confirm the presence of long and variable lags in the monetary policy
transmission, as predicted by Milton Friedman. - Introduction
The quantity theory of money (QTM) is a central tenet of monetary economics and became the
workhorse model of the Monetarist school in the 20th century. - 1 It postulates a stable long-run link
between the quantity of money and prices and implies that money growth is a key driver of inflation
over longer horizons. - Lucas (2006) emphasized that the monetary pillar of central bank policy decisively
contributed to reducing inflation when it was too high. - In the 1970s and 1980s, central bankers and
researchers paid much attention to the quantity equation, and many countries pursued monetary targeting
as their monetary policy strategy (see Table 1). - Towards the end of the 20th century, severe velocity
shocks occurred, thus violating the constant money velocity assumption of the quantity theory. - *** insert Table 1 here ***
This study provides a reassessment of QTM based on panel approaches and using the dataset from
Jord? et al. - (2017) for 18 industrial countries that allow to conduct tests for the very long sample from
1870 to 2020. - The results show that an I(2) modeling strategy is not
indicated (Juselius, 2021; Assenmacher and Beyer, 2020; Jung and Carcel Villanova, 2020). - Within this
approach, I examine time variation by estimating the regressions for different subsamples and providing
rolling window regressions of the CCEPMG estimator. - Second, panel regressions confirm the presence of long and variable lags in the monetary policy
transmission, as predicted by Milton Friedman. - Notable exceptions are studies based on
country approaches for the United States and the United Kingdom (e.g., Benati, 2005; Sargent and
Surico, 2008). - Section 4 provides empirical results on the long-run link between excess
money growth and inflation and section 5 concludes. - A well-known implication of the quantity theory is that in the long run (i.e., if V and Yr are fixed),
the price level is proportional to the money stock, and there is no link between money growth and real
variables. - The empirical literature has focused on the point that ?a given change in the quantity of money
induces ? an equal change in the rate of price inflation? (Lucas, 1980). - The literature suggests that excess money growth, i.e., nominal money in excess of real GDP, is
more closely related to inflation. - Lucas (1980 and 1996) suggested that the link between money growth and inflation may not be
found in the data owing to statistical noise. - Chart 2 illustrates the long-run comovement between money growth and
inflation for 18 industrial countries between 1900 and 2000. - whether a given change in the quantity of money induces
an equal change in nominal rates of interest. - McCandless and Weber (1995) also examined the link between money
growth and real GDP growth and found no correlation. - Testing the validity of the quantity theory may also face some limitations concerning the correct
measurement of money growth or inflation. - Famous researchers have argued that the Divisia approach to calculating monetary aggregates
would be best suited to test the quantity theory (Barnett, 1980; Lucas, 2000). - Long-run Evidence on the Quantity Theory of Money.
- The quantity theory of money: Its historical evolution and role in policy debates.
- Two illustrations of the quantity theory of money.
- ), A journey
from theory to practice ? an ECB colloquium held in honour of Otmar Issing, 16-17 March 2006, 168171. - Two illustrations of the quantity theory of money: breakdowns and revivals.
- The dashed line illustrates a coefficient of 1, as stipulated by the quantity theory of money; for
broad money, no data for Belgium was available until 1980.