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Long-run monetary neutrality under stochastic and deterministic trends

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  • Ventosa-Santaulària, Daniel
  • Noriega, Antonio E.

Abstract

This paper studies long-run monetary neutrality when long-horizon regressions (LHR) are used as a vehicle to test it. We assume that money and/or output can be generated according to widely used persistent models. We combine these specifications and study the divergence rate of the t-statistic as an indication of a spurious relationship between money and output, and show that the presence of spurious evidence of non-neutrality is highly likely. We then propose a correct inferential procedure for testing the null hypothesis of no relationship in a LHR (finite-sample and asymptotic evidence supports the procedure). The latter is then applied to an international data set on money and output in order to test for long-run monetary neutrality. We find that neutrality holds for all countries.

Suggested Citation

  • Ventosa-Santaulària, Daniel & Noriega, Antonio E., 2015. "Long-run monetary neutrality under stochastic and deterministic trends," Economic Modelling, Elsevier, vol. 47(C), pages 372-382.
    • Handle: RePEc:eee:ecmode:v:47:y:2015:i:c:p:372-382
    DOI: 10.1016/j.econmod.2015.03.010
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