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The Quantity Theory of Money and Friedmanian Monetary Policy: An Empirical Investigation

Author

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  • Claude Hillinger
  • Bernd Süssmuth
  • Marco Sunder

Abstract

We introduce an approach for the empirical study of the quantity theory of money (QTM) that is novel both with respect to the specific steps taken as well as the general methodology employed. Empirical studies of the QTM have focused directly on the relationship between the rate of change of the money stock and inflation. We believe that this is an inferior starting point for several reasons and focus instead on the Cambridge form of the QTM. We find that the coefficient k fluctuates strongly in the short run, but has a low and steady rate of change in the long run, which makes the QTM a useful instrument for the long-run control of inflation. An important finding that contradicts all of the previous literature is that the QTM holds for low inflation as well as for high inflation. We discuss how our findings relate to monetarism generally and propose an adaption of McCallum’s rule for a Friedmanian monetary policy.

Suggested Citation

  • Claude Hillinger & Bernd Süssmuth & Marco Sunder, 2012. "The Quantity Theory of Money and Friedmanian Monetary Policy: An Empirical Investigation," CESifo Working Paper Series 3754, CESifo.
    • Handle: RePEc:ces:ceswps:_3754
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    References listed on IDEAS

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    1. Hillinger, Claude, 2008. "Measuring Real Value and Inflation," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 2, pages 1-26.
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    3. Andreas Hoffmann & Gunther Schnabl, 2011. "A Vicious Cycle of Manias, Crises and Asymmetric Policy Responses – An Overinvestment View," The World Economy, Wiley Blackwell, vol. 34(3), pages 382-403, March.
    4. Pedro Teles & Harald Uhlig & João Valle e Azevedo, 2016. "Is Quantity Theory Still Alive?," Economic Journal, Royal Economic Society, vol. 126(591), pages 442-464, March.
    5. Christopher A. Sims, 2010. "But Economics Is Not an Experimental Science," Journal of Economic Perspectives, American Economic Association, vol. 24(2), pages 59-68, Spring.
    6. Gerald P. Dwyer & Rik Hafer, 1999. "Are money growth and inflation still related?," Economic Review, Federal Reserve Bank of Atlanta, vol. 84(Q2), pages 32-43.
    7. Estrella, Arturo & Mishkin, Frederic S., 1997. "Is there a role for monetary aggregates in the conduct of monetary policy?," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 279-304, October.
    8. Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 173-203, January.
    9. Gerald P. Dwyer & Rik Hafer, 1988. "Is money irrelevant?," Review, Federal Reserve Bank of St. Louis, issue May, pages 3-17.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Cambridge equation; Friedman's k rule; monetarism; quantity theory;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other

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