Monetary Facts or Monetarist Facts? A Re-Examination

The Quantity Theory of Money claims to provide one of the few long-run guides to economic policy by providing specific numbers to characterise the correlation between money growth and inflation. Acceptance of the Quantity Theory has been greatly helped by the claim, propounded most effectively by Robert Lucas, that the evidence for the central claims of the Quantity Theory can be corroborated by ‘a theoretical’ examination of the data. We re-examine this empirical claim in two ways. First, we show how, for both theoretical and statistical reasons, the facts accepted by Lucas lack the force he attributes to them. Secondly, we then examine the data from 102 countries in three parts: first as an aggregate, then again across five regions, and finally in a sample of specific countries. There is a positive relationship between money supply growth and inflation, but the correlation is not the proportional one predicted by the Quantity Theory - either for the full sample or any of the subsamples. These results are inconsistent with the primary empirical claims made for the general applicability of the Quantity Theory.