• Table of Contents
    • Abstract
    • Keywords
    • Article
      • 1 The formal theory
        • (a) Nominal versus real quantity of money
        • (b) Quantity equations
          • The transactions form of the quantity equation
          • The income form of the quantity equation
          • Cambridge cash-balance approach
          • Levels versus rates of change
        • (c) The supply of money
        • (d) The demand for money
          • Demand by ultimate wealth holders
          • Demand for business enterprises
          • Buffer stock effects
        • (e) The reconciliation of demand with supply
        • (f) First-round effects
        • (g) The international transmission mechanism
      • 2 Keynesian challenge to the quantity theory
      • 3 The Phillips curve and the natural rate hypothesis
      • 4 The theory of rational expectations
      • 5 Empirical evidence
        • Evidence from specie standards
        • Evidence from great inflations
        • Other evidence
      • 6 Policy implications
    • Bibliography
    • How to cite this article

quantity theory of money

Milton Friedman
From The New Palgrave Dictionary of Economics, Second Edition, 2008
Edited by Steven N. Durlauf and Lawrence E. Blume
Alternate versions available: 1987 Edition
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Abstract

After formally setting out the quantity theory of money, including the distinction between the nominal quantity of money and the real quantity of money, and various quantity equations, this article considers the Keynesian challenge to the theory (which seemed vindicated during the economically successful 1950s and 1960s) and the revival of belief in the quantity theory in the 1970s as rapid monetary growth was accompanied by stagflation and rising interest rates. It deals with the natural rate hypothesis and the theory of rational expectations, surveys the empirical evidence, and ends with a consideration of policy implications.
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Keywords

American Economic Association; anticipated inflation; arbitrage; Bretton Woods System; buffer stocks; cash-balance version of the quantity equation; commodity standards; credit; deflation; demand for money; demand–supply analysis; deposit–currency ratio; deposit–reserve ratio; easy money; excess balances; expectations; export subsidies; fiat money; fiscal policy; Fisher, I.; foreign exchange controls; free banking; Friedman, M.; full employment; Great Depression; high-powered money; human vs. non-human wealth; Hume, D.; hyperinflation; import controls; income velocity; interest rate; Keynes, J. M.; law of one price; liquidity; liquidity preference; Lucas, R.; managed exchange-rate floating; Mill, J.S.; Modigliani, F.; monetary growth targeting; monetary illusion; monetary policy rules; monetary transmission mechanism; money; money multiplier; money supply; moneyness; Muth, J. F.; natural rate hypothesis; natural rate of unemployment; neutrality hypothesis about stabilization policy; nominal interest rate; nominal quantity of money; Phillips curve; price control; price indices; price revolution; price rigidity; quantity equations; quantity theory of money; rate of return on money; rational expectations; real interest rate; real quantity of money; Ricardo, D.; Sargent, T. J.; specie-flow mechanism; speculative motive; stagflation; static vs. long-run equilibrium; structural unemployment; Thornton, H.; Tobin, J.; transactions and precautionary motives; transactions velocity; transactions version of the quantity equation; variability of inflation; velocity of circulation; wage rigidity
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Article

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How to cite this article

Friedman, Milton. "quantity theory of money." The New Palgrave Dictionary of Economics. Second Edition. Eds. Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan, 2008. The New Palgrave Dictionary of Economics Online. Palgrave Macmillan. 31 July 2014 <http://www.dictionaryofeconomics.com/article?id=pde2008_Q000006> doi:10.1057/9780230226203.1374

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