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Long-Run Neutrality in a Long-Memory Model

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  • SangKun Bae

    (Korea Institute for Industrial Economics and Trade)

  • Mark J. Jensen

    (University of Missouri - Columbia)

Abstract

In this paper we use a bivariate, fractionally integrated, autoregressive, moving average model of money and real output to extend Fisher and Seater (1993) long-run neutrality requirements to long-memory processes. We derive new restrictions on the order of the nominal and real variable and discuss their implications when long-run neutrality is tested with a reduced form econometric model. These new restrictions show how finding money to be nonstationary is not sufficient for testing long-run neutrality. A long-memory process can be both nonstationary and mean reverting, meaning an exogenous monetary shock has no long-run effect on money if it is such a process. We also use the fractionally integrated, autoregressive, moving average model to estimate and test the order of integration of money and real output. Since unit root tests have low power against long-memory processes, directly estimating the differencing parameter is more robust to the presence of short and long- memory. Lastly, we apply our long-memory framework to a century worth of annual money supply and real output data for Argentina, Australia, Canada, Italy, Sweden, the UK, and the US and discover that long-run neutrality is testable in six of the seven countries and holds in five of the six countries.

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File URL: http://128.118.178.162/eps/mac/papers/9809/9809006.ps.gz
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 9809006.

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Length: 23 pages
Date of creation: 14 Sep 1998
Date of revision: 30 Sep 1998
Handle: RePEc:wpa:wuwpma:9809006

Note: Type of Document - Postscript; prepared on UNIX Ultra TeX; to print on Postscript; pages: 23 ; figures: included in document
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Web page: http://128.118.178.162

Related research

Keywords: Long-Memory; Long-Run Neutrality;

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References

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  1. Sowell, Fallaw, 1990. "The Fractional Unit Root Distribution," Econometrica, Econometric Society, vol. 58(2), pages 495-505, March.
  2. Francis X. Diebold & Glenn D. Rudebusch, 1990. "On the power of Dickey-Fuller tests against fractional alternatives," Finance and Economics Discussion Series 119, Board of Governors of the Federal Reserve System (U.S.).
  3. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  4. Serletis, Apostolos & Koustas, Zisimos, 1998. "International Evidence on the Neutrality of Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(1), pages 1-25, February.
  5. Mark J. Jensen, 1997. "Using Wavelets to Obtain a Consistent Ordinary Least Squares Estimator of the Long Memory Parameter," Econometrics 9710002, EconWPA.
  6. Sowell, Fallaw, 1992. "Maximum likelihood estimation of stationary univariate fractionally integrated time series models," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 165-188.
  7. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  8. Sowell, Fallaw, 1992. "Modeling long-run behavior with the fractional ARIMA model," Journal of Monetary Economics, Elsevier, vol. 29(2), pages 277-302, April.
  9. 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.
  10. Robert G. King & Mark W. Watson, 1997. "Testing long-run neutrality," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 69-101.
  11. 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.
  12. Mark J. Jensen, 1997. "An Alternative Maximum Likelihood Estimator of Long-Memeory Processes Using Compactly Supported Wavelets," Econometrics 9709002, EconWPA.
  13. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
  14. Canova, Fabio, 1994. "Testing long-run neutrality: Empirical evidence for G7-countries with special emphasis on Germany A comment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 119-125, December.
  15. Serletis, Apostolos & Krause, David, 1996. "Empirical evidence on the long-run neutrality hypothesis using low-frequency international data," Economics Letters, Elsevier, vol. 50(3), pages 323-327, March.
  16. Bullard, James & Keating, John W., 1995. "The long-run relationship between inflation and output in postwar economies," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 477-496, December.
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Citations

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Cited by:
  1. Antonio E. Noriega & Luis M. Soria & Ramón Velázquez, 2008. "International Evidence on Stochastic and Deterministic Monetary Neutrality," Working Papers 2008-04, Banco de México.
  2. R. Velazquez & A.E. Noriega & L.M. Soria, 2004. "International Evidence on Monetary Neutrality Under Broken Trend Stationary Models," Econometric Society 2004 Latin American Meetings 57, Econometric Society.
  3. Noriega, Antonio E. & Soria, Luis M. & Velázquez, Ramón, 2008. "International evidence on stochastic and deterministic monetary neutrality," Economic Modelling, Elsevier, vol. 25(6), pages 1261-1275, November.
  4. James Bullard, 1999. "Testing long-run monetary neutrality propositions: lessons from the recent research," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 57-77.
  5. Noriega, Antonio E., 2004. "Long-run monetary neutrality and the unit-root hypothesis: further international evidence," The North American Journal of Economics and Finance, Elsevier, vol. 15(2), pages 179-197, August.

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