<p>The quantity theory of money is stated as a simple equation which states that the general price level of goods and services is directly proportional to the amount of money in circulation. This is written as:</p>

<p>$$\text{MV}=\text{PQ}$$</p>

<p>I got interested in testing this relationship econometric relationship however found that this neat equation got alot <del>messier</del> more complected in applied work using VARs and the like to test it.<sup>(1)</sup></p>

<p>How can such a simple equation be presented? Any help would be appreciated.</p>

<hr>

<p><sub>(1)see:<br> a)<a href="http://www.bu.edu/econ/files/2011/01/Lucas2illustrations1.pdf" rel="nofollow noreferrer">http://www.bu.edu/econ/files/2011/01/Lucas2illustrations1.pdf</a><br>b)<a href="https://www.researchgate.net/profile/Erdal_Ozmen/publication/233505652_Testing_the_quantity_theory_of_money_in_Greece/links/53f32d400cf2da8797445547/Testing-the-quantity-theory-of-money-in-Greece.pdf" rel="nofollow noreferrer">https://www.researchgate.net/profile/Erdal_Ozmen/publication/233505652_Testing_the_quantity_theory_of_money_in_Greece/links/53f32d400cf2da8797445547/Testing-the-quantity-theory-of-money-in-Greece.pdf</a> <br> c)<a href="https://pdfs.semanticscholar.org/377f/13a3e57742d5f279c097835266d43db16c0d.pdf" rel="nofollow noreferrer">https://pdfs.semanticscholar.org/377f/13a3e57742d5f279c097835266d43db16c0d.pdf</a></sub></p>

CC BY-SA 3.0
2018-02-08T14:51:31.663Z
This is probably not going to satisfy a statistician, but just plot the time series of V. Does it look remotely constant? If not, it’s a waste of time to pursue the subject.
Brian Romanchuk
CC BY-SA 3.0
2018-02-08T16:59:23.447Z
@BrianRomanchuk well somehow this is still in many economics textbooks and much has been written on it. I don't think its a waste of time as you can see in the sources provided, the theory is analysed and tested.
EconJohn
CC BY-SA 3.0
2018-02-08T19:01:20.657Z
Sorry, I was in a sarcastic mood. I should have deleted the comment. The issue with the velocity relationship is that so many people are convinced it holds, and will add any numbers of epicycles to preserve the theory. Why would you expect to be able to invalidate a theory that has epicycles constantly added to it? What is the value of a theory which relies on epicycles?  It is actually an interesting demonstration of the limitations of economic methodology when it collides into prior beliefs.
Brian Romanchuk
<applied-econometrics><quantity-theory-of-money>
Static and Dynamic models: Testing the Quantity Theory of Money
EconJohn
# Static and Dynamic models: Testing the Quantity Theory of Money

(Asked by: username_0 on 2018-02-08)

The quantity theory of money is stated as a simple equation which states that the general price level of goods and services is directly proportional to the amount of money in circulation. This is written as:

$$\text{MV}=\text{PQ}$$

I got interested in testing this relationship econometric relationship however found that this neat equation got alot ~~messier~~ more complected in applied work using VARs and the like to test it.(1)

How can such a simple equation be presented? Any help would be appreciated.

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(1)see:  
 a)<http://www.bu.edu/econ/files/2011/01/Lucas2illustrations1.pdf>  
b)<https://www.researchgate.net/profile/Erdal_Ozmen/publication/233505652_Testing_the_quantity_theory_of_money_in_Greece/links/53f32d400cf2da8797445547/Testing-the-quantity-theory-of-money-in-Greece.pdf>   
 c)<https://pdfs.semanticscholar.org/377f/13a3e57742d5f279c097835266d43db16c0d.pdf>

**Tags:** applied-econometrics, quantity-theory-of-money

> **Comments:**
> **username_1**: This is probably not going to satisfy a statistician, but just plot the time series of V. Does it look remotely constant? If not, it’s a waste of time to pursue the subject.  
> **username_0**: @BrianRomanchuk well somehow this is still in many economics textbooks and much has been written on it. I don't think its a waste of time as you can see in the sources provided, the theory is analysed and tested.  
> **username_1**: Sorry, I was in a sarcastic mood. I should have deleted the comment. The issue with the velocity relationship is that so many people are convinced it holds, and will add any numbers of epicycles to preserve the theory. Why would you expect to be able to invalidate a theory that has epicycles constantly added to it? What is the value of a theory which relies on epicycles?  It is actually an interesting demonstration of the limitations of economic methodology when it collides into prior beliefs.  

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## 0 answers

