The Quantity Theory of Money: Valid Only for High and Medium Inflation?
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The Quantity Theory of Money: Valid Only for High and Medium Inflation?
Hillinger, Claude | Süssmuth, Bernd | Sunder, Marco
Applied Economics Quarterly, Vol. 61 (2015), Iss. 4 : pp. 315–329
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University of Munich (professor emeritus).
University of Leipzig, Institute for Empirical Research in Economics, Grimmaische Str. 12, 04109 Leipzig, Germany.
University of Leipzig, Institute for Empirical Research in Economics, Grimmaische Str. 12, 04109 Leipzig, Germany.
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 cross-sectional 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.
JEL Classification: E31, E41, E51, E59, C180