Abstract

The Quantity Theory of Money and the Theory of Credit Creation have been the major streams in the study of the quantity of money. Nowadays, monetary theory is dominated by the Quantity Theory of Money because the Monetarist School and the Rational Expectation School are both the advocates of the Quantity Theory of Money, which has resulted in a sharp decrease of scholars studying the Theory of Credit Creation. Nevertheless, the two theories will ultimately converge. Given that reason, we propose a new theory—Dynamic Quantity Theory of Money in this paper, by which the unification of the Quantity Theory of Money and the Theory of Credit Creation can be achieved. Based on the Dynamic Quantity Theory of Money, we further put forward the Theory of Money Operation Cycle, the Theory of Monetary Compensation and Theory of Investment Compensation targeting economic crises, expound why Quantitative Easing monetary policy fails and why Quantitative Easing does not cause inflation in the short term under the premise of these theories, and demonstrate the necessity of fiscal investment for rescuing economic crisis from the perspective of theories of money.

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