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International evidence on monetary neutrality under broken trend stationary models

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  • R. Velazquez
  • Noriega
  • A.

Abstract

We analyze the issue of the impact of multiple breaks on monetary neutrality results, using a long annual international data set. We empirically verify whether neutrality propositions remain addressable (and if so, whether they hold or not), when unit root tests are carried out allowing for multiple structural breaks in the long-run trend function of the variables. It is found that conclusions on neutrality are sensitive to the number of breaks allowed. In order to interpret the evidence for structural breaks, we utilize a notion of deterministic monetary neutrality, which naturally arises in the absence of permanent stochastic shocks to the variables. We utilize a resampling procedure based on the fact that changes in the trend function bias unit root tests towards a non-rejection. In particular, using a dynamic programming algorithm to obtain global minimizers of the RSS for locating breaks, we simulate the distribution of the t-statistic for the null of a unit root, under the hypotheses that the true models are a TS model with up to four structural breaks, and a DS model. We present evidence in favour of models in which the cycle fluctuates in a stationary way around a broken trend. In other words, the (unit root) permanent stochastic changes vanish, giving rise to stationary behaviour affected by infrequent structural breaks. This leads to interesting questions about the testing for monetary neutrality

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 282.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:282

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Keywords: Neutrality and Superneutrality of Money; Unit Root Testing; Multiple Structural Breaks; Resampling Methods;

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  1. Amparo Maset-Llaudes & Ana Mª Fuertes-Eugenio & Pilar Pardo-Forcadell, 2011. "Integrated Urban Regeneration: An Empirical Study Of The Normative Framework In Spanish Regions," ERSA conference papers ersa11p1781, European Regional Science Association.

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