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Panel cointegration and the neutrality of money

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  • Joakim Westerlund
  • Mauro Costantini

Abstract

Most econometric methods for testing the proposition of long-run monetary neutrality rely on the assumption that money and real output do not cointegrate, a result that is usually supported by the data. This paper argues that these results can be attributed in part to the low power of univariate tests, and that a violation of the noncointegration assumption is likely to result in a nonrejection of the neutrality proposition. To alleviate this problem, two new and more powerful panel cointegration tests are proposed that can be used under very general conditions. The tests are then applied to a panel covering 10 countries between 1870 and 1986. The results suggest money and real output are cointegrated, and that the neutrality proposition therefore must be rejected.
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  • Joakim Westerlund & Mauro Costantini, 2009. "Panel cointegration and the neutrality of money," Empirical Economics, Springer, vol. 36(1), pages 1-26, February.
    • Handle: RePEc:spr:empeco:v:36:y:2009:i:1:p:1-26
    DOI: 10.1007/s00181-007-0181-y
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    3. Lee, Chien-Chiang & Chiu, Yi-Bin, 2016. "Globalization and insurance activity: Evidence on the industrial and emerging countries," The North American Journal of Economics and Finance, Elsevier, vol. 36(C), pages 328-349.
    4. Chen, Ping-Yu & Chen, Sheng-Tung & Hsu, Chia-Sheng & Chen, Chi-Chung, 2016. "Modeling the global relationships among economic growth, energy consumption and CO2 emissions," Renewable and Sustainable Energy Reviews, Elsevier, vol. 65(C), pages 420-431.
    5. Mauro Costantini & Claudio Lupi, 2013. "A Simple Panel-CADF Test for Unit Roots," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 75(2), pages 276-296, April.
    6. Marika Karanassou & Hector Sala & Dennis J. Snower, 2010. "Phillips Curves And Unemployment Dynamics: A Critique And A Holistic Perspective," Journal of Economic Surveys, Wiley Blackwell, vol. 24(1), pages 1-51, February.
    7. Jin Lee, 2012. "Nonparametric Testing for Long-Run Neutrality with Applications to US Money and Output Data," Computational Economics, Springer;Society for Computational Economics, vol. 40(2), pages 183-202, August.
    8. Kuek, Tai Hock, 2016. "A Review of Literature on Monetary Neutrality - The case of India," MPRA Paper 71962, University Library of Munich, Germany, revised 13 Jun 2016.
    9. Fabio Milani, 2009. "Adaptive Learning and Macroeconomic Inertia in the Euro Area," Journal of Common Market Studies, Wiley Blackwell, vol. 47(3), pages 579-599, June.
    10. Teh Tian Huey & Daniel Chin Shen Li, 2017. "Measuring bank risk-taking behaviour: the risk-taking channel of monetary policy in Malaysia," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Statistical implications of the new financial landscape, volume 43, Bank for International Settlements.
    11. Olivier Habimana, 2019. "Wavelet Multiresolution Analysis of the Liquidity Effect and Monetary Neutrality," Computational Economics, Springer;Society for Computational Economics, vol. 53(1), pages 85-110, January.
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    14. Francesca Di Iorio & Stefano Fachin, 2011. "A sieve bootstrap range test for poolability in dependent cointegrated panels," DSS Empirical Economics and Econometrics Working Papers Series 2011/2, Centre for Empirical Economics and Econometrics, Department of Statistics, "Sapienza" University of Rome.

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    More about this item

    Keywords

    Monetary neutrality; Panel cointegration testing; E30; E50; C12; C22; C23;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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