The Quantity Theory of Money in Historical Perspective
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Date
2008-04
Publication Type
Working Paper
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yes
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Abstract
The paper reconstructs the origins of the quantity theory of money and its applications. Against the background of the history of money, it is shown that the theory was flexible enough to adapt to institutional change and thus succeeded in maintaining its relevance. To this day, it is useful as an analytical framework. Although, due to Goodhart's Law, it now has only limited potential to guide monetary policy and was consequently abandoned by most central banks, an empirical analysis drawing on a panel data set covering more than hundred countries from 1991 to the present confirms that the theory still holds: a positive correlation between the excess growth rate of the stock of money and the rate of inflation cannot be rejected. Yet, while the correlation holds for the whole sample, proportionality is driven by a small number of influential observations with very high inflation.
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published
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Volume
196
Pages / Article No.
Publisher
KOF Swiss Economic Institute, ETH Zurich
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Subject
WIRTSCHAFTSTHEORIEN DES 19. UND 20. JAHRHUNDERTS; MONETARY POLICY; ECONOMIC PHILOSOPHY; WIRTSCHAFTSPHILOSOPHIE; ECONOMIC THEORIES OF 19TH AND 20TH CENTURY; NATIONAL BANKS + CENTRAL BANKS; GELDPOLITIK; NATIONALBANKEN + ZENTRALBANKEN
Organisational unit
02525 - KOF Konjunkturforschungsstelle / KOF Swiss Economic Institute