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The Quantity Theory of Money: Valid Only for High and Medium Inflation?

Claude Hillinger, Bernd Süssmuth and Marco Sunder

Applied Economics Quarterly (formerly: Konjunkturpolitik), 2015, vol. 61, issue 4, 315-329

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 crosssectional 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.

Keywords: quantity theory of money; equation of exchange; inflation; monetary policy (search for similar items in EconPapers)
Date: 2015
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Applied Economics Quarterly (formerly: Konjunkturpolitik) is currently edited by Cinzia Alcidi, Christian Dreger and Daniel Gros

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