A possible failure might be caused by the nominal (and real) rigidities. In the contemporary mainstream macroeconomics, prices and/or wages are often assumed to be sticky (e.g. due to small menu costs or forward-looking pricing). Hence, changes in money supply would produce an inadequate (in sense of the quantity theory) response of nominal variables.

Interesting idea. And yes, there are many possible failures of a "nominal amount of money" in the meaning of the quantity equation.

In general, the quantity equation is valid as long the totel amount of money really available is clear. If some parts of the amount of money (however it is summarized) are NOT available in a given period ... it creates a failure for the usage of the given (defined) amount of money in comparison to the active money ... I think.

I think it is important to take account of the valuation equation of total liability of the consoldated government (central bank + fiscal authority) as well as money quantity equation because of the presence of non-indexed government bonds in the real world.

Consolidated government liability consists of money and nominal bonds. The real value of the total liability has to meet the present value of total sum of future seigniorage and surpluses.

As long as the fiscal authority is constrained so as to adjust surpluses to meet the current real amount of nominal bonds given the price level, nominal bonds do not have any influence on the price level; the rest of the liability, money, pins down the price level. In this case, the money quantity equation arises.

By contrast, if fiscal policy is not constrained in such a way, not money alone but the total liability including nominal bonds determins the price; future path of fiscal surpluses now becomes exogenous and the price level is adjusted so that the real amount of money plus bonds meet the present value of future seigniorage and surpluses.

The quantity theory may or may not hold, depending on the systematic conduct of both monetary and fiscal policies. Some economists like John Cochrane argue the recent situation from this viewpoint.

The so-called quantity equation, is no more valid because it stands on a false assumption that the rise of M does influence T and it is directly affecting P. We know (at least since Cantillon in 1755) that more money causes more production and therefore more transactions and more income, as we know since Keynes and the multiplier effect. What remains however true, is that a sudden rise of M, creates an unexpected push of the level of deand and affects positively prices.

@Michael: I have some doubts of the saying "no more valid" ... and that more money causes more production. There is no real explanation to find a reasoning of such a system get to work - in my thinking.

At the moment we do not see a rise in production - but we see a extremely abnormal rise in money printed.

The problem, as I see it, is, that there is no final understanding of the reasoning of such a construction of "more money produces more production".

It hardly can't be true - because of a final limit of production in every real world.

But there is no defined limit of printing money.

So, indefinite money supply can therefore not causing an also indefinite production process.

(unless you define production as a part of just a money universe. Then it can be unlimited also. But ... what you want to use such money for? At the end, normally someone want to buy something ... something real ... with money.)

I think, the quantity equation is still valid - but a lot of overlaying factors covers this fact.

For example: Money saving (in a safe) keeps (already printed) money from beeing used for a given time. This amount of money can not be took into the equation for the period of evaluation ... I think.

@Haruki: Thanks for the paper!

I also found one interesting paper:

http://www.nber.org/papers/w16393.pdf

And I am wondering, if the inflation rate is really ONE TRUE measured unit.

Is the inflation rate really valid for the total amount of money floating around?

I have huge doubts about this.

The inflation rate is done by looking to price tags of some kind of real products ... but these products are not all on the one big market, where the big money flows around.

I think, one failure is also, that the inflation rate is not covering ALL inflationary tendencies (Penthouses in Manhattan, Sylt, Art, Oldtimer, Luxury products ... ) and so on.

@Michel Zouboulakis: Quantity equation is equation (without assumptions). Through assumptions is equation M.V=P.T transformed to a Quantity Theory.

Dear Hak,

thank you very much for this hint. Sounds quite interesting. I found a very interesting pdf-book "THE SCHOOL OF SALAMANCA" ... with theoretical discussions of theory of value and so on.

Quite useful.

And I totally agree - the quantity equation is still valid ... but it is overlayed with a lot of different blinding effects.

(One is, that the inflation rate is only looking at a very small amount of real goods, not at all on the total sum of all kind of economy).

Olaf

http://mises.org/books/salamanca_grice-hutchinson.pdf

The Quantity Equation (Fisher or its earlier British incarnation) is an identity, so it must be true. MV = PT. It is true because it says the value of money spent = the value of goods sold. It is also true because velocity, V, ends up being defined as V=PT/M. The question should be is the quantity theory of money (in whatever form) useful or valid. Early monetary stories were fairly compelling when money could be easily defined (look at the simple Friedman stories of patterns of spending). The theory was reworked as a demand for money theory, so now M is money demand, k=1/V and the money demand equation becomes M=kPT. Early versions of the theory view V or k as constant. However, M became more complicated (M0, M1, M2, M2, MZM etc.) and velocity was decidedly not stable. The question became was V or k predictable, say as a function of interest rates? Some researchers at the Fed thought so when they produced the P* model in the early 1990s but that fell apart a long time ago. Then the question was if money supply and money demand were not equal, what adjusted? The Friedman model was the real economy was determined by real factors (Walrasian equations) and the variable that adjusted was the price level. Hence the quantity theory of inflation, which is I think what economists traditionally think of when quantity theory is mentioned. Clearly this does not hold, at least in the short run (look at any measure of M in the US in the wake of QE). However, this does not mean that the proposition that inflation is a monetary phenomenon in Friedman's classic dictum. It does mean that any simple quantity theory doesn't hold for modern economies.

Dear John, thanks for this huge load of good information about my simple question.

Relating to the quantity theory of inflation: I think there is one problem in the accounting of the inflation rate - and that is the overlapping failure of a lot of influences. A rising M1, M2 or M3 ... did not necessarilly flow directly into the pockets of the buyer of daily products.

One way of a better Inflationrate could be an alternative measurement tool for the total size of the economy, outside of a monetary system.

Given the case that such a system would be existing ... it could help with this problem, I think.

@Hak I pointed out that the quantity equation is an identity in my post.

Olaf, there is a problem with the simple quantity story as to how money is created. It is not Friedman's helicopter but the purchase of bonds. In the run up to the financial crisis, house prices became inflated but that was not captured in inflation rates because housing as an asset (rather than a flow of services) is excluded from the CPI. You are probably correct in saying that there is a problem with measurement of what might be being inflated. At the present time, it is bond yields that are being repressed and bond prices inflated, but again that is not in the CPI.

@John: Yes, I really think there is something wrong with the measurements, the CPI, the Asset definition and so on. The underlaying problem is that there is no qualified and measurable definition of "the economic product" in general ...

That is what I want to answer, describe the basic physical dimension of all kind of economic doing - which results in a measurable economy, measurable without any money system or moneylike matter or else.

Given the case there is this "definition" ...

... then the quantity equation could be solved in saying "Well, lets say that this given macro economy of the size of 10.000.000 measurable physical units of XX gets an amount of 1.000.000.000 units of money, lets call it DuckDollar ...

That would be a solution of the "identity" problem you addressed ... or what do you think?

If there is a maesurable unit of economic doing ... then this solution would be there, right?

Olaf

Olaf I think this goes back to Adam Smith and David Ricardo and the notion of an invariable standard of value. I spent a lot of time in my Cambridge days debating this topic but ultimately came to the conclusion that such a standard of value does not exist. Smith-Ricardo had a labor standard of value. The neo-Ricardians took Sraffa as the missing piece of the puzzle. But I think that they were fooling themselves. Introduce capital and trying to create physical units (a la a neoclassical production function with L and K as arguments) just falls apart. All aggregation involves committing sin as it were.

Dear John, yes, it is the same question, i agree.

but - given the case that there is an answer for the (for now) "unanswered" question of a measurable definition of an economy - then the quantity equation would quite easily get a new answer ...

And for the question of "standard of value" - i totally agree that the hunt for "one piece" (common good, or whatever) with a given standard value ... is not possible to solve.

The most important point to highlight here is: Value is not constant. Value is always changing - and value is NOT at all a characteristic of any kind of product itself. One given value is always nothing more than one moment of continuously changing values.

A value of one thing is not coming from the "thing" itself - it is always coming from external thinking, from human thinking - it is not at all a real characteristic of one good. And that is true for gold, silver, artwork, oldtimer cars, whatever ... it is true for everything.

The average value for one thing can be decribed quite precisely if this one product is traded quite often ... but it is still never a real value of anything.

But one thing is for sure: Value is always relative.

And the question is: Relative to what?

And that is the question where you find the final answer - the solution IS there.

The is an answer to the relativity of value - it is quite easy. I described it already in my paper.

If you have a unit to measure the total size of an economy - you have the "what" as a measurable size.

The question of "relative to what?" can be answered. And the Answer is, that it is the total energy you use to produce ALL products in total. Therefore i wrote the very short paper "Energy as the numéraire of any given economy".

There is nothing in an economy happening without energy, because everything which is happening needs energy in general.

Money is not necessary to run an economy, but energy is. And the amount of energy you have to produce goods is the limit of every production. Efficiency will change the number of goods in a given limit - but never the total value of all goods. A rising number of one good forces a lower price by competition inside of a given limit.

Technology changes the nature and the character of goods - in a given limit the total value stays the same, the economy stays steady size.

Or technology enables the more intense grap into external forms of stored energy to produce more goods in total. The economy grows.

There are more questions to be answered, that is for sure, but this approach is quite interesting to think about - I think it is a posible answer ...