The quantity theory of money in central banking, 1870–2020

Alexander Jung

Chapter 2 in Are Central Banks Still Conservative?, 2025, pp 37-58 from Edward Elgar Publishing

Abstract: The Quantity Theory of Money (QTM), a central tenet of monetary economics, posits that money growth is a crucial driver of inflation. In line with Rogoff (1985), intermediate monetary targets turned out to be an answer to the time inconsistency problem. They helped central banks reduce inflation when it was high but have lost relevance over recent decades when inflation was under control. This chapter revisits QTM by applying time series analysis and panel cointegration techniques to a comprehensive dataset by Jordà et al. (2017) spanning 150 years (1870–2020) across 18 industrial countries. It confirms the presence of a long-run relationship between excess money growth and inflation for a sample of 18 industrial countries. The empirical analysis reveals that the long-term link between (excess) money growth and inflation holds for extended periods. In recent decades, however, the relationship has weakened significantly due to structural change, particularly during the Great Moderation and given advancements in payment technologies, leading to the breakdown of the QTM's traditional formulation. In addition, the analysis confirms the presence of long and variable lags in the transmission of monetary policy, as predicted by Milton Friedman, amid significant heterogeneity across time and countries.

Keywords: Inflation; Money growth; Great Moderation; Payment technologies; Policy regimes; Structural change (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035337569
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