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Two Illustrations of the Quantity Theory of Money Reloaded

Working Paper 774 | Published December 15, 2020

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Authors

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

Abstract

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. We conclude that the low-frequency behavior of these series maintains a close relationship, as predicted by standard quantity theory models. In an estimated model, we show those relationships to be relatively invariant to alternative frictions that can deliver very different high-frequency dynamics. We argue that these relationships are useful for policy design aimed at controlling inflation.