Testing the quantity theory of money in Greece

Abstract

This paper tests two monetarist hypotheses on the Greek data: (1) the predictability of income velocity of money; and (2) the proportionality postulate between nominal income (or, prices) and money. The unit root tests with structural breaks show that the velocity of narrow money can be characterized as a stationary process. The Autoregressive Distributed Lag (ARDL) approach to cointegration indicates that the proportionality postulate between nominal income (or, prices) and money is supported by the data. This evidence suggests that shocks which affect the money supply are reflected in the nominal income (or, prices) in a similar way, thus velocity will not fluctuate widely and its movements will be predictable.