ABSTRACTThis paper is an application of efficient markets‐rational expectations theory to analyze empirically the relationship of money supply growth and short‐term interest rates, a hotly debated issue in the literature. This approach has the advantage over earlier research on this subject in that it imposes a theoretical structure that allows easier interpretation of the empirical results as well as more powerful statistical tests. The empirical results uniformlydo not supportthe proposition that increases in money growth are correlated with declines in short ra