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The Quantity Theory of Money: Valid Only for High and Medium Inflation?

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  • Claude Hillinger
  • Bernd Süssmuth
  • Marco Sunder

Abstract

Under the assumption of a constant liquidity preference in the equation of exchange, the quantity theory of money (QTM) has been frequently confirmed for strong inflation regimes, but much less so for medium or low inflation. Against the backdrop of Milton Friedman’s famous rule and relaxing the constancy assumption, we study the time series and crosssectional properties of central variables of the Cambridge-form of the equation of exchange across a large sample of countries. In doing so, we particularly focus on the liquidity preference parameter. Our cross-country analysis confirms Friedman’s conviction drawn from US data as we find the liquidity preference to also internationally grow secularly by about 2 percent p.a. on average. This holds for low-inflation as well as high-inflation countries.

Suggested Citation

  • Claude Hillinger & Bernd Süssmuth & Marco Sunder, 2015. "The Quantity Theory of Money: Valid Only for High and Medium Inflation?," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot GmbH, Berlin, vol. 61(4), pages 315-329.
    • Handle: RePEc:dah:aeqaeq:v61_y2015_i4_q4_p315-329
    DOI: 10.3790/aeq.61.4.315
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    2. Markus Pasche, 2018. "Money as an Inflationary Phenomenon," Jena Economic Research Papers 2018-011, Friedrich-Schiller-University Jena.
    3. Philipp F. M. Baumann & Enzo Rossi & Alexander Volkmann, 2020. "What Drives Inflation and How: Evidence from Additive Mixed Models Selected by cAIC," Papers 2006.06274, arXiv.org, revised Aug 2022.

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