This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Testing Long Run Neutrality

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Robert King
Mark W. Watson

Additional information is available for the following registered author(s):

Abstract

Propositions about long run neutrality are at the heart of most macroeconomic models. Yet, since the 1970's when Lucas and Sargent presented powerful critiques of traditional neutrality tests, empirical researchers have made little progress on testing these propositions. In this paper we show that. in spite of the Lucas-Sargent critique. long run neutrality can be tested without specifying a complete model of economic activity. This is possible when the variables are integrated. In this case, permanent shifts in the historical data can be uncovered using VAR methods, and neutrality can be tested when there is a priori knowledge of one of the structural impact multipliers or one of the structural long run multipliers. In most circumstances such a priori knowledge is available. We use this framework to test four long run neutrality propositions: (i) the neutrality of money, (ii) the superneutrality of money. (iii) a vertical long run Phillips curve, and (iv) the Fisher effect. In each application, our a priori knowledge consists of a range of plausible values for the relevant impact and long run multipliers. We find that the U.S. postwar data are consistent with the neutrality of money and a vertical long run Phillips curve. but find evidence against the superneutrality of money and the long run Fisher relation. The sign of the estimated effect of money growth on output depends on the particular identifying assumption used. For a wide range of plausible identifying restrictions, nominal interest rates are found to move less than one-for-one with inflation in the long run.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help file. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.nber.org/papers/w4156.pdf
File Format: application/pdf
File Function:
Download Restriction: Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Publisher Info
Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4156.

Download reference. The following formats are available: HTML, plain text, BibTeX, RIS (EndNote), ReDIF
Length:
Date of creation: Sep 1992
Date of revision:
Publication status: published as King, Robert G. and Mark W. Watson. "Testing Long-Run Neutrality," FRB Richmond - Economic Review, 1997, v83(3,Summer), 69-101.
Handle: RePEc:nbr:nberwo:4156

Note: EFG ME
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

For technical questions regarding this item, or to correct its listing, contact: ().

Related research
Keywords:

Other versions of this item:

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.:
  1. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393. [Downloadable!] (restricted)
  2. Geweke, John F, 1986. "The Superneutrality of Money in the United States: An Interpretation of the Evidence," Econometrica, Econometric Society, vol. 54(1), pages 1-21, January. [Downloadable!] (restricted)
  3. Stock, James H., 1991. "Confidence intervals for the largest autoregressive root in U.S. macroeconomic time series," Journal of Monetary Economics, Elsevier, vol. 28(3), pages 435-459, December. [Downloadable!] (restricted)
    Other versions:
  4. Beveridge, Stephen & Nelson, Charles R., 1981. "A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the `business cycle'," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 151-174. [Downloadable!] (restricted)
  5. Marvin Goodfriend, 1987. "Interest rate smoothing and price level trend-stationarity," Working Paper 87-03, Federal Reserve Bank of Richmond.
    Other versions:
  6. Rotemberg, Julio J & Driscoll, John C & Poterba, James M, 1995. "Money, Output, and Prices: Evidence from a New Monetary Aggregate," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(1), pages 67-83, January.
    Other versions:
  7. Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1991. "Stochastic trends and economic fluctuations," Working Paper Series, Macroeconomic Issues 91-4, Federal Reserve Bank of Chicago.
    Other versions:
  8. Sargent, Thomas J, 1971. "A Note on the 'Accelerationist' Controversy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 3(3), pages 721-25, August. [Downloadable!] (restricted)
  9. James H. Stock & Mark W. Watson, 1987. "Interpreting Evidence on Money-Income Causality," NBER Working Papers 2228, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Martin D.D. Evans & Karen K. Lewis, 1993. "Do Expected Shifts in Inflation Affect Estimates of the Long-Run Fisher Relation?," Working Papers 93-06, New York University, Leonard N. Stern School of Business, Department of Economics.
    Other versions:
  11. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
  12. Christopher A. Sims, 1989. "Models and their uses," Discussion Paper / Institute for Empirical Macroeconomics 11, Federal Reserve Bank of Minneapolis. [Downloadable!]
  13. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-48, September. [Downloadable!] (restricted)
    Other versions:
  14. Sargent, Thomas J, 1976. "A Classical Macroeconometric Model for the United States," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 207-37, April. [Downloadable!] (restricted)
  15. King, Robert G. & Watson, Mark W., 1994. "The post-war U.S. phillips curve: a revisionist econometric history," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 157-219, December. [Downloadable!] (restricted)
    Other versions:
  16. Yash P. Mehra, 1995. "Some key empirical determinants of short-term nominal interest rates," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 33-51. [Downloadable!]
  17. Gali, Jordi, 1992. "How Well Does the IS-LM Model Fit Postwar U.S. Data," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 709-38, May. [Downloadable!] (restricted)
  18. Fisher, Mark E & Seater, John J, 1993. "Long-Run Neutrality and Superneutrality in an ARIMA Framework," American Economic Review, American Economic Association, vol. 83(3), pages 402-15, June. [Downloadable!] (restricted)
  19. Blanchard, Olivier Jean, 1989. "A Traditional Interpretation of Macroeconomic Fluctuations," American Economic Review, American Economic Association, vol. 79(5), pages 1146-64, December. [Downloadable!] (restricted)
  20. Christiano, Lawrence J & Eichenbaum, Martin, 1995. "Liquidity Effects, Monetary Policy, and the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1113-36, November. [Downloadable!] (restricted)
    Other versions:
  21. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February. [Downloadable!] (restricted)
  22. Lucas, Robert E, Jr, 1980. "Two Illustrations of the Quantity Theory of Money," American Economic Review, American Economic Association, vol. 70(5), pages 1005-14, December. [Downloadable!] (restricted)
  23. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February. [Downloadable!] (restricted)
  24. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April. [Downloadable!] (restricted)
  25. Robert King & Mark W. Watson, 1992. "Testing Long Run Neutrality," NBER Working Papers 4156, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  26. Hausman, Jerry A & Newey, Whitney K & Taylor, William E, 1987. "Efficient Estimation and Identification of Simultaneous Equation Models with Covariance Restrictions," Econometrica, Econometric Society, vol. 55(4), pages 849-74, July. [Downloadable!] (restricted)
  27. McCallum, Bennett T., 1984. "On low-frequency estimates of long-run relationships in macroeconomics," Journal of Monetary Economics, Elsevier, vol. 14(1), pages 3-14, July. [Downloadable!] (restricted)
    Other versions:
  28. Matthew D. Shapiro & Mark W. Watson, 1988. "Sources of Business Cycle Fluctuations," Cowles Foundation Discussion Papers 870, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  29. Bernanke, Ben S., 1986. "Alternative explanations of the money-income correlation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 49-99, January. [Downloadable!] (restricted)
  30. Robert J. Gordon, 1970. "The Recent Acceleration of Inflation and Its Lessons for the Future," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 1(1970-1), pages 8-47. [Downloadable!]
  31. Frederic S. Mishkin, 1993. "Is the Fisher Effect for Real? A Reexamination of the Relationship Between Inflation and Interest Rates," NBER Working Papers 3632, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  32. Ben S. Bernanke, 1986. "Alternative Explanations of the Money-Income Correlation," NBER Working Papers 1842, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  33. Aschauer, David & Greenwood, Jeremy, 1983. "A Further Exploration in the Theory of Exchange Rate Regimes," Journal of Political Economy, University of Chicago Press, vol. 91(5), pages 868-75, October. [Downloadable!] (restricted)
  34. Lawrence H. Summers, 1984. "The Nonadjustment of Nominal Interest Rates: A Study of the Fisher Effect," NBER Working Papers 0836, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  35. Robert J. Barro & Mark Rush, 1979. "Unanticipated Money and Economic Activity," NBER Working Papers 0339, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, 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.)
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.
Statistics
Access and download statistics

Did you know? Cannot find something on IDEAS? Encourage the publisher to index it! Instructions.

This page was last updated on 2008-10-11.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.