A Quantity Theory Framework for Monetary Policy

When the quantity theory is exposited in a way that takes account of the actual practice followed by monetary authorities of setting a target for the rate of interest, it provides a useful framework for understanding monetary policy procedures. The quantity theory also highlights the importance to the monetary authority of controlling the price level. The theory suggests monetary policy procedures that retain the use of the interest rate as a policy variable, but make the price level the monetary authority's objective.