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Monetarist arithmetic at COVID‐19 time: A take on how not to misapply the quantity theory of money
Author(s) -
Pinter Julien
Publication year - 2022
Publication title -
economic notes
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.274
H-Index - 19
eISSN - 1468-0300
pISSN - 0391-5026
DOI - 10.1111/ecno.12200
Subject(s) - monetarism , relevance (law) , economics , money supply , inflation (cosmology) , endogenous money , quantity theory of money , keynesian economics , meaning (existential) , variable (mathematics) , velocity of money , demand deposit , demand for money , positive economics , moneyness , covid-19 , monetary policy , monetary economics , law , epistemology , mathematics , philosophy , theoretical physics , medicine , mathematical analysis , physics , disease , pathology , political science , infectious disease (medical specialty)
The COVID‐19 crisis has revived an old heated debate on whether significant increases in the money supply ultimately lead to higher inflation. Some observers have alluded to the quantity theory of money for that purpose, though in our view, this has sometimes been in a misleading way. Against this background, this paper seeks to clarify several aspects of the quantity theory of money, which are useful to apply it fairly in the current world. First, we review the meaning of the velocity term in the quantity equation. We argue that it has no relevance as a behavioural concept: there is no such thing as a 'desired velocity'. Rather, income velocity should be seen as a variable deriving from a system of parameters and variables related to money demand, as the monetarist approach clearly puts it, with no intrinsic relevance. Second, we clarify the practical relevance that the quantity theory approach can bear in the 21st century. Third, we review the channels and assumptions underlying the asserted quantity theory link between money growth and inflation. In light of our analysis, we conclude that the high money growth rates seen since the pandemic outbreak are unlikely to translate into higher inflation rates.