DOES MONEY STILL MATFER?

The basic tenant of the quantity theory, that money matters, has been challenged by a number of recent empirical studies. Benjamin Friedman and Kenneth Kuttner (1992) report that the empirical rela-tion between money and economic activity appears to have changed after 1970, with moneynowplaying aless important role. In an earlier study, Robert Gordon (1982) finds little evidence that anticipated changes in the money supply affect real output.And contraryto Milton Friedman’s (1968) admonition that instability in the rate of growth of the nation’s money supply has caused large and damaging fluctua-tions in economic activity, Robert Litterman and Laurence Weiss (1985) find that monetary fiuctqations have not been a major factor causing instability in the economy. Using the Granger causality test, Christopher Shnms (1972) found that causality runs entirely from money to GNP without feedback. However, in alater study Simms (1980: 250) reports that “a nonmone-tarist explanation of the dynamics, based on the role of expectations in investment behavior, seems to fit the estimated dynamics better.” In a more strongly worded conclusion, Christopher Niggle (1991) argues that monetarist rules are nonsensical becausethe moneysupply is determined endogenously bythe interaction ofbanksandborrowers. In other words, even if money does matter, the monetary authority cannot stabilize the economy or influence economic activity because of an inability to manage the money supply. In the original quantity theory, money (M) has a direct impact on nominal income (Y or GDP). Since the quantity equation ofexchange