Rapid Money Supply Growth Does Not Cause Inflation

Rapid Money Supply Growth Does Not Cause Inflation


Monetarism has for years, dominated the mainstream of economic thinking about the causes of inflation. In this report, we challenge the central tenant of the monetarist theory that inflation is a “monetary phenomenon” caused by the inflation of the money supply using historical evidence.

Neither does Rapid Growth in Government Debt, Declining Interest Rates, or Rapid Increases in a Central Bank’s Balance Sheet

By Richard W. Vague, Managing Partner, Gabriel Investments

Monetarist theory, which came to dominate economic thinking in the 1980s and the decades that followed, holds that rapid money supply growth is the cause of inflation.  The theory, however, fails an actual test of the available evidence.  In our review of 47 countries, generally from 1960 forward, we found that more often than not high inflation does not follow rapid money supply growth, and in contrast to this, high inflation has occurred frequently when it has not been preceded by rapid money supply growth.

The purpose of this paper is to present these findings and solicit feedback on our data, methods, and conclusions.

To analyze the issue, we developed a database of 47 countries that together constitute 91 percent of global GDP and looked at each episode of rapid money supply growth to see if it was followed by high inflation. In the majority of cases, it was not. In fact, the opposite was true—a large percentage of the cases of high inflation were not preceded by high money supply growth. These 47 countries all rank within the top 70 largest economies as measured by GDP and include each of the top 20 countries. If a country was not included, it was because we could not get a complete enough set of historical data on that country.