Abstract

Modern Quantity Versus Liquidity Theory: A Test of Rival Hypotheses

The foregoing study sets out to assess the information content of monetarıstic and liquidity-theory concepts for the Federal Republic of Germany. For both concepts tests are made of rival hypotheses, which were taken over by Köhler. Computations were based on seasonally adjusted, quarterly figures for the period from the 1st quarter, 1960, to the fourth quarter, 1968. The test functions of the theses and countertheses give no satisfactory results, if correlation coefficients are used as a measure of connection betwen variables, and Durbin-Watson coefficients for autocorrelation. On the other hand, a comparison of the results for the rival hypotheses permits the conclusion that the monetaristic concept is superior. In particular, the rough trend can be indicated by the following statements: - the quantity of money, and not the balance of liquidity, must be ascribed the greater significance as a monetary variable; - the direction of influence is from the quantity of money to nominal aggregate demand, and not vice versa; - the German Bundesbank was relatively successful in controlling the monetary supply process.