Allais' Restatement of the Quantity Theory: Comment

Abstract

In a recent article in this Review, Maurice Allais proposed a model of demand for money based on the 'psychological rate of expansion' (p. 1129). His formulation of model has certain arithmetic implications that appear implausible. The psychological rate of expansion (Allais' z) is comparable to Phillip Cagan's rate of change in prices (Cagan's E, p. 35).1 Although Allais, like Cagan, relates his psychological rate of expansion to remembrance of past events, he is not specific about its precise economic meaning (pp. 1129-30, 1155).2 In particular, there is some confusion whether his variable z or Z= 250z is appropriate counterpart to expected rate of change in prices.3 However, it seems clear, despite some effort by Allais to differentiate his product, that z, an estimate of anticipations of growth in total outlays, is his basic construct while Z is introduced [t]o facilitate econometric analysis. . (p. 1132). Allais' equation (2.28) defines Z by