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Long-run monetary neutrality and long-horizon regressions

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Author Info

  • Patrick J. Coe

    (Department of Economics, University of Calgary, Canada)

  • James M. Nason

    (Research Department, Federal Reserve Bank of Atlanta, USA)

Abstract

A prominent test of long-run monetary neutrality (LRMN) involves regressing long-horizon output growth on long-horizon money growth. We obtain limited support for LRMN with this test in long-annual Australian, Canadian, UK and US samples. Although empirical confidence intervals yield evidence in favour of LRMN, Monte Carlo experiments reveal the power of this test is near its size. Thus, this test is unlikely to detect important deviations from LRMN. These problems arise because the long-horizon regression test of LRMN relies on estimates of the covariance of long-horizon output growth and long-horizon money growth. Copyright © 2004 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/jae.749
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File URL: http://qed.econ.queensu.ca:80/jae/2004-v19.3/
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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 19 (2004)
Issue (Month): 3 ()
Pages: 355-373

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Handle: RePEc:jae:japmet:v:19:y:2004:i:3:p:355-373

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References

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  9. James Bullard, 1999. "Testing long-run monetary neutrality propositions: lessons from the recent research," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 57-77.
  10. Haug, Alfred A & Lucas, Robert F, 1997. "Long-Run Neutrality and Superneutrality in an ARIMA Framework: Comment," American Economic Review, American Economic Association, vol. 87(4), pages 756-59, September.
  11. Andrews, Donald W K, 1989. "Power in Econometric Applications," Econometrica, Econometric Society, vol. 57(5), pages 1059-90, September.
  12. Lucas, Robert E, Jr, 1996. "Nobel Lecture: Monetary Neutrality," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 661-82, August.
  13. Boschen, John F. & Mills, Leonard O., 1995. "Tests of long-run neutrality using permanent monetary and real shocks," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 25-44, February.
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Citations

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Cited by:
  1. Frederick H.Wallace & Gary L. Shelley, 2007. "Long Run Neutrality of Money in Mexico," Economia Mexicana NUEVA EPOCA, , vol. 0(2), pages 219-238, July-Dece.
  2. Antonio E. Noriega & Daniel Ventosa-Santaulària, 2010. "Spurious Long-Horizon Regression in Econometrics," Working Papers 2010-06, Banco de México.
  3. Westerlund, Joakim & Costantini, Mauro, 2006. "Panel Cointegration and the Neutrality of Money," Working Papers 2006:18, Lund University, Department of Economics.
  4. Frederick H. Wallace & Gary L. Shelley, 2005. "An Alternative Test of Purchasing Power Parity," International Finance 0502009, EconWPA.
  5. Frederick H. Wallace & Gary L. Shelley, 2004. "Long Run Neutrality and Superneutrality of Money: Aggregate and Sectoral Tests for Nicaragua," Macroeconomics 0402004, EconWPA.
  6. Becker, Sascha O. & Hoffmann, Mathias, 2006. "Intra- and international risk-sharing in the short run and the long run," European Economic Review, Elsevier, vol. 50(3), pages 777-806, April.
  7. Jonathan B. Hill, 2007. "Efficient tests of long-run causation in trivariate VAR processes with a rolling window study of the money-income relationship," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(4), pages 747-765.
  8. Serletis, Apostolos & Gogas, Periklis, 2004. "Long-horizon regression tests of the theory of purchasing power parity," Journal of Banking & Finance, Elsevier, vol. 28(8), pages 1961-1985, August.
  9. repec:ebl:ecbull:v:3:y:2007:i:64:p:1-18 is not listed on IDEAS
  10. Lastrapes, William D. & Potts, Todd B., 2006. "Durable goods and the forward-looking theory of consumption: Estimates implied by the dynamic effects of money," Journal of Economic Dynamics and Control, Elsevier, vol. 30(8), pages 1409-1430, August.
  11. Shelley, Gary & Wallace, Frederick, 2006. "Long run effects of money on real consumption and investment in the U.S," MPRA Paper 4136, University Library of Munich, Germany.
  12. Shyh-Wei Chen, 2007. "Evidence of the Long-Run Neutrality of Money: The Case of South Korea and Taiwan," Economics Bulletin, AccessEcon, vol. 3(64), pages 1-18.

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