Is Quantity Theory Still Alive?

Abstract

This article 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 the theories of Baumol–Tobin and Miller–Orr. Finally, a subsample characterised by the adoption of inflation targeting shows considerably less inflation variability, worsening the fit of a one‐for‐one relationship between money growth and inflation.