Money, prices, and output: stylised facts and implications for the quantity theory of money

Abstract

First, we update stylised facts about the associations between money supply, prices, and output for 27 countries for the period 1999-2020 using the Hamilton filter; then, we examine the quantity theory of money apropos the said associations. We find mixed evidence regarding the cyclicality of inflation and money growth. More specifically, we find that inflation is acyclical in India, the UK, and the Euro Area, strongly procyclical in China, weakly procyclical in Canada and the US, and strongly countercyclical in Brazil. Moreover, money supply growth is strongly countercyclical in the US and Canada, strongly procyclical in India, and acyclical in the UK and the Euro Area. There is considerable evidence of negative contemporaneous correlations between money supply growth and inflation. Overall, the results contradict the quantity theory of money and call for a new paradigm for understanding the nexus between prices, output, and the money supply.