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Money Growth, Output Growth, and Inflation: Estimation of a Modern Quantity Theory
Author(s) -
Moroney John R.
Publication year - 2002
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.1002/j.2325-8012.2002.tb00499.x
Subject(s) - economics , inflation (cosmology) , growth theory , quantity theory of money , real interest rate , monetary economics , keynesian economics , monetary policy , macroeconomics , econometrics , physics , theoretical physics
This paper develops a long‐run version of the quantity theory of money growth, real GDP growth, and inflation. Inflation rates, averaged for the years 1980‐1993, are computed for 81 countries. These cross‐section inflation rates are explained almost entirely by average M2 growth rates. In countries marked by high money growth and inflation, the estimated coefficients of M2 growth are strikingly close to one, strongly confirming the quantity theory. By contrast, in countries with relatively low money growth and inflation, the estimated money growth coefficient is only 0.69; the quantity theory offers a less complete explanation of inflation. Money growth and GDP growth are nearly orthogonal, consistent with long‐run monetary superneutrality. The quantity theory is a reliable model of inflation for most countries, but not for those experiencing slow long‐run money growth.