A critical note on the quantity theory of money

Abstract

Quantity theorists assert that “money matters” and mean by this that changes in the quantity of money have substantial and important effects on key economic variables like real income or the price level. Unfortunately, the Quantity Theory discussion of the impact of changes in the quantity of money on income, prices, etc., suffers from unrigorous examination of basic propositions. The present paper shows that failure to examine the processes whereby the quantity of money can be changed has led to serious error in the case of the Quantity Theory. Quantity theorists have a revealed preference for monetary control of economic instability while Keynesians emphasise fiscal policy. Yet, according to the author’s analysis, the changes in the quantity of money fundamental to monetary policy may be difficult to accomplish under Quantity Theory assumptions and more easily accomplished under Keynesian assumptions.

JEL: B22, E41, E51, E52