Quantitative Theory of Money or Prices? A Historical, Theoretical, and Econometric Analysis

TL;DR

This paper investigates the dynamic relationship between money and prices across multiple countries using advanced econometric and machine learning methods, revealing their reciprocal influence and non-neutrality over time.

Contribution

It provides a comprehensive analysis combining historical, theoretical, and empirical approaches to demonstrate the complex, bidirectional relationship between money and prices.

Findings

Money is not neutral at any time horizon.

There is a reciprocal influence between money and prices.

The non-neutrality is transmitted through aggregate demand.

Abstract

This research studies the relation between money and prices and its practical implications analyzing quarterly data from United States (1959-2022), Canada (1961-2022), United Kingdom (1986-2022), and Brazil (1996-2022). The historical, logical, and econometric consistency of the logical core of the two main theories of money is analyzed using objective bayesian and frequentist machine learning models, bayesian regularized artificial neural networks, and ensemble learning. It is concluded that money is not neutral at any time horizon and that, despite money is ultimately subordinated to prices, there is a reciprocal influence over time between money and prices which constitute a complex system. Non-neutrality is transmitted through aggregate demand and is based on the exchange value of money as a monetary unit.