Would you expect that quantity theory would do a better job of predicting inflation in high-income countries such as the United States or Germany or in less developed countries such as Kenya or Zimbabwe?


1 Answers

Anonymous Profile
Anonymous answered

The general consensus is that Quantity Theory would do a better job of predicting inflation for less developed countries - or specifically, countries which have an inflation rate of higher than 10%

Post-Keynesian studies show that there isn't much of a correlation between money growth and inflation in countries that have low inflation rates.

De Grauwe and Polan set the level by which a countries inflation rate excludes it from the application of quantity theory as less than 10% over 30 consecutive years.

There's also a question about how proportionate the relationship between inflation and the growth rate of money, which applies to countries with high inflation rates too.

This makes quantity theory pretty ineffective over all.

It's also important to remember that there are three different versions of the quantity theory, so the accuracy of predictions is dependant on which one you're applying.

Answer Question