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Oil Prices and Money Neutrality

Author

Listed:
  • Samih Antoine Azar

    (Faculty of Business Administration and Economics, Haigazian University, Mexique Street, Kantari, Beirut, Lebanon,)

  • Philip Karam

    (Advisory Team, Bank Julius Baer, Geneva, Switzerland)

Abstract

The purpose of this paper is to estimate a parsimonious model of money demand. The model relates international crude oil prices to the US money stock with the addition of a valuation adjustment. The main conometric estimation procedure is the autoregressive distributed lag approach. The model is checked for robustness by changing the econometric procedure to the Johansen estimator, by changing the functional form of the conditional variance, and by applying alternative cointegration tests. Oil prices and the US money stock move in tandem in the long run. The association is unit proportional which implies money neutrality. The major conclusion is that oil prices have an anchor, which is the US money stock, and no event whether intended or unintended is capable to destabilize the model. Hence monetary authorities are passive observers, and cannot manipulate economic variables to control real oil prices in the long run.

Suggested Citation

  • Samih Antoine Azar & Philip Karam, 2019. "Oil Prices and Money Neutrality," International Journal of Economics and Financial Issues, Econjournals, vol. 9(4), pages 172-180.
    • Handle: RePEc:eco:journ1:2019-04-20
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Crude Oil Prices; US Money Stock; Cointegration; Long Run; Money Neutrality; Robustness;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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