----------------- 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]