Quantity Theory of Money
The quantity theory is MV = PY: money times velocity equals nominal income. In the strong form, a one-off money increase raises prices one-for-one if V and Y are stable.
Definition
Fisher’s equation of exchange is an identity. The theory is the claim that V is stable (or independently determined) so money growth maps into inflation at a useful horizon. Modern QE broke naive V-stability: base money exploded while velocity collapsed.
Why it matters
It is the skeleton of every ‘money printing equals inflation’ take. Sometimes it is the right reduced form (high inflation economies); often it is not (ELB + QE).
Case
2020–22: M2 jumped and CPI later jumped, which monetarists claimed as vindication. The same identity in 2009–14 showed huge base growth and no inflation — V was the missing variable.
How to read it
Never quote M without V and the opportunity cost of money. If deposits are paying 5%, V is a different animal than when they pay 0%.
Key papers
Landmark references with real publisher or arXiv links — not token-overlap noise.
- The Quantity Theory of Money: A RestatementFriedman · 1956 · Studies in the Quantity Theory of MoneyModern monetarist restatement.