The Quantity Theory of Credit

Originally developed by Richard Duncan, the quantity theory of credit is similar to the monetarist theory of the quantity theory of money. This theory, which states that PQ = CV (P= prices, Q= quantity, C= credit, V= velocity), implies (ceteris paribus) that when credit increases, so does output. I will be using this theory to analyze the United States GDP and debt levels over the last 30 years. Specifically I will be reviewing the level of both household and government debt, as well as the effects on GDP.

I have a general blueprint in my mind about government spending that I want to test. My idea is that government borrowing should decrease when household borrowing increases, and that it should increase when household borrowing decreases (essentially a countercyclical fiscal policy). Just from a preliminary look at the data, the budget surplus accumulated during Clinton's second term should have continued throughout the first decade of the new millennium, during the boom years at least. In the same way, government borrowing should have increased following the financial crisis, which it did.

We will see whether or not my idea of fiscal policy holds up to the stress of econometric analysis.