----------------- HES POSTING ----------------- 
 
Thomas M. Humphrey, in his article entitled "The Quantity Theory of Money: 
Its Historical Evolution and Role in Policy Debates", defines the QTM as a 
hypothesis based ultimately on five fundamental propositions.  He begins 
his statement on the causal role of money, the second proposition, as 
follows: 
 
"A second key proposition of the quantity theory states that the direction 
of causality or channel of influence runs from M to P, i.e., monetary 
changes precede and cause price level changes." 
 
A strict Quantity Theorist would conclude that the popular textbook case 
depicting a sustained rise in the price level through a "ratification" or 
monetary validation of an adverse supply shock is, in fact, a classic case 
of misperceiving a relative price change for a change in the "absolute" 
level of money prices.  If we define the QTM in terms of the EOE model, 
then, say, with M, V and T as given, an adverse supply shock would set in 
motion a "teeter-totter" effect amongst the set of relative prices and, as 
a result, the aggregate price level would remain unchanged. 
 
The QTM in its traditional garb has always been unrelenting in its 
opposition to cost-push theories, that is, placing movements in money 
prices prior to movements in money.  Any attempt to define modern 
monetarism as a furtherance of the QTM, which I believe it must be, would 
have to fully accept Humphrey's second proposition as "key" to the theory 
and reject any variety of P to M causality. 
 
Chas Anderson 
 
------------ FOOTER TO HES POSTING ------------ 
For information, send the message "info HES" to [log in to unmask]