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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Paper provided by Lund University, Department of Economics in its series Working Papers with number
2006:18.
Length: 27 pages Date of creation: 09 Aug 2006 Date of revision: Publication status: Forthcoming in Empirical Economics. Handle: RePEc:hhs:lunewp:2006_018
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Find related papers by JEL classification: C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data 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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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Robert G. King & Mark W. Watson, 1997.
"Testing long-run neutrality,"
Economic Quarterly,
Federal Reserve Bank of Richmond, issue Sum, pages 69-101.
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