From the Quantity Theory of Money towards the Functional Differentiation of Credit: The Role of Non-GDP Transactions in Germany, Italy, and Switzerland

Due to higher inflation rates since 2021, economists worldwide are reconsidering the role of stocks and flows of monetary aggregates. In this context, quantity theories of money (QTMs) are often revived, according to which the amount of money determines inflation or nominal GDP. Against this backdrop, we review the origins of QTMs. Although these theories are often motivated by an indisputable identity, the equation of exchange, we show that this equation is empirically estimated with poor proxies. While the theoretical critique of QTMs by Schumpeter and others has historically not been very successful, it failed to explain the decoupling between money and nominal GDP in the 1980s. We investigate whether non-GDP transactions can explain the decoupling between money or credit and nominal GDP in Germany, Italy, and Switzerland.