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Two Illustrations of the Quantity Theory of Money Reloaded

Staff Report 633 | Published December 17, 2021

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Han Gao University of New South Wales, Sydney
Mariano Kulish University of Sydney
Juan Pablo Nicolini Senior Research Economist and Universidad Torcuato Di Tella
Two Illustrations of the Quantity Theory of Money Reloaded


In this paper, we review the relationship between inflation rates, nominal interest rates, and rates of growth of monetary aggregates for a large group of OECD countries. If persistent changes in the monetary policy regime are accounted for, the behavior of these series maintains the close relationship predicted by standard quantity theory models. With an estimated model, we show those relationships to be relatively invariant to alternative frictions that can deliver quite different high-frequency dynamics. We also show that the low-frequency component of the data derived from statistical filters does reasonably well in capturing these regime changes. We conclude that the quantity theory relationships are alive and well, and thus they are useful for policy design aimed at controlling inflation.

Related: [Staff Report 634: Online Appendix]( This paper is a substantially revised version of [Working Paper 774](