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The Lucas hypothesis on monetary shocks: evidence from a GARCH-in-mean model

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  • Sajjadur Rahman

    (Texas A&M University-San Antonio)

Abstract

In this paper, we review the Lucas hypothesis that the impact on real output to unanticipated nominal shocks is inversely related across countries to the variability of such shocks. In doing so, we model money supply volatility explicitly to capture important volatility effects that previous work has ignored. Using postwar data from 39 countries, we find empirical evidence in favor of the hypothesis. Our results are robust to data mining, alternative data frequencies, alternative measures of nominal shocks and monetary policy instruments, and alternative measures of the level of economic activity.

Suggested Citation

  • Sajjadur Rahman, 2018. "The Lucas hypothesis on monetary shocks: evidence from a GARCH-in-mean model," Empirical Economics, Springer, vol. 54(4), pages 1411-1450, June.
    • Handle: RePEc:spr:empeco:v:54:y:2018:i:4:d:10.1007_s00181-017-1270-1
    DOI: 10.1007/s00181-017-1270-1
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    More about this item

    Keywords

    Volatility of money growth; GARCH-in-mean model;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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