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January/February 1994, 
Vol. 76, No. 1
Posted 1994-01-01

Measures of Money and the Quantity Theory

by James Bullard

Many economists believe that the quantity theory of money explains the relationship between money and inflation over long periods of time. In particular, they believe that a permanent increase in the quantity of money will eventually produce an equiproportionate permanent increase in the general level of prices. Similarly, a more rapid, sustained rate of money growth will produce a higher rate of inflation. James B. Bullard examines, from a nonstructural, low-frequency point of view, the basic proposition that money growth and inflation are closely related in the long run. The article extends the analysis of Robert E. Lucas, Jr., whose work is often cited as an illustration of the validity of the quantity theory. Bullard’s results generally support the quantity theoretic proposition that money is long-run neutral.