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Testing monetary neutrality with respect to relative price of oil using divisia M4

Author

Listed:
  • Baek, Jungho
  • Caton, James Lee
  • Miljkovic, Dragan

Abstract

In classical macroeconomic thought, monetary neutrality represents the theoretical baseline. The framework asserts that, in the long-run, nominal factors do not impact real factors. However, classical macroeconomics has little to say about the composition of productive capital. This has been of less concern to modern economists, but it was of particular concern to pre-Keynesian macroeconomists. Irving Fisher recognized that monetary factors may lead to short-run distortions of relative prices. Despite this recognition, the traditional macroeconomic framework allows for no consideration of persistent relative price distortions. We investigate presentations of macroeconomic theory where such distortions are considered or are at least possible. We leverage the fact that monetary equilibrium does not imply general equilibrium and that transaction costs make reassertion of the initial capital allocation unlikely. We empirically detect persistent distortions in the relative price of oil that suggest that monetary factors generate persistent distortions in capital structure.

Suggested Citation

  • Baek, Jungho & Caton, James Lee & Miljkovic, Dragan, 2025. "Testing monetary neutrality with respect to relative price of oil using divisia M4," The Quarterly Review of Economics and Finance, Elsevier, vol. 101(C).
  • Handle: RePEc:eee:quaeco:v:101:y:2025:i:c:s1062976925000195
    DOI: 10.1016/j.qref.2025.101978
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    Keywords

    Monetary neutrality; Monetary economics; Relative price of oil; Structural change;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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