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Stronger evidence of long-run neutrality: a comment on Bernanke and Mihov

Author

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  • Giordani, Paolo

    (Dept. of Economics, Stockholm School of Economics)

Abstract

Few propositions in macroeconomics are less controversial than long-run money neutrality, yet clear and robust empirical support has not been found in time series studies. Bernanke and Mihov (1998) are comparatively successful in this hunt, but their output response to monetary policy shocks remains stubbornly persistent. This paper argues that the omission of a measure of output gap from the VAR estimated by Bernanke and Mihov lies at the heart of this ''excessive'' persistence. In the theoretical framework of a New Keynesian model similar to that of Svensson (1997) and Clarida, Gali and Gertler (1999), I prove that this omission induces persistence overestimation under relatively mild assumptions. The inclusion of a proxy for the output gap in the VAR is then shown to drastically increase the evidence for long-run money neutrality on US data, as predicted by the theoretical analysis.

Suggested Citation

  • Giordani, Paolo, 2001. "Stronger evidence of long-run neutrality: a comment on Bernanke and Mihov," SSE/EFI Working Paper Series in Economics and Finance 441, Stockholm School of Economics, revised 11 May 2001.
    • Handle: RePEc:hhs:hastef:0441
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    Cited by:

    1. 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.

    More about this item

    Keywords

    long-run money neutrality; technology shocks; output gap; VAR misspecification;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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