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Testing Long-run Neutrality: Empirical Evidence for G7 Countries with Special Emphasis on Germany

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  • Weber, Axel A

Abstract

Modern neo-Keynesian, new classical, and real business cycle models typically differ in the degree to which they incorporate long-run or short-run neutrality propositions. Despite their importance, little firm international evidence on the validity of these neutrality hypotheses is available to date. This paper applies a bivariate VAR approach to test the long-run restrictions implied by a number of neoclassical neutrality propositions. The evidence from the G7 countries appears to be consistent with the long-run neutrality of money and the vertical Phillips curve, but the data largely refute the long-run super-neutrality of money and the `Fisher effect' of inflation on interest rates.

Suggested Citation

  • Weber, Axel A, 1994. "Testing Long-run Neutrality: Empirical Evidence for G7 Countries with Special Emphasis on Germany," CEPR Discussion Papers 1042, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1042
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    Citations

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    Cited by:

    1. Pascal Jacquinot, 2001. "L'inflation sous-jacente en France, en Allemagne et Royaume-Uni," Economie & Prévision, La Documentation Française, vol. 147(1), pages 171-185.
    2. James B. Bullard & Steven Russell, 1998. "Monetary steady states in a low real interest rate economy," Working Papers 1994-012, Federal Reserve Bank of St. Louis.
    3. Ribba, Antonio, 2007. "Permanent disinflationary effects on unemployment in a small open economy: Italy 1979-1995," Economic Modelling, Elsevier, vol. 24(1), pages 66-81, January.
    4. Joakim Westerlund & Mauro Costantini, 2009. "Panel cointegration and the neutrality of money," Empirical Economics, Springer, vol. 36(1), pages 1-26, February.
    5. Zisimos Koustas & Jean-Francois Lamarche, 2005. "Policy-Induced Mean Reversion in the Real Interest Rate?," Working Papers 0503, Brock University, Department of Economics, revised Jul 2005.
    6. 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.
    7. Mark J. Jensen, 2009. "The Long-Run Fisher Effect: Can It Be Tested?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(1), pages 221-231, February.
    8. João R. Faria & Francisco Galrão Carneiro, 2001. "Does High Inflation Affect Growth in the Long and Short Run?," Journal of Applied Economics, Universidad del CEMA, vol. 4, pages 89-105, May.
    9. Camille Logeay & Silke Tober, 2003. "Time-varying Nairu and Real Interest Rates in the Euro Area," Discussion Papers of DIW Berlin 351, DIW Berlin, German Institute for Economic Research.
    10. Beyer, Andreas & Dewald, William G. & Haug, Alfred A., 2009. "Structural breaks, cointegration and the Fisher effect," Working Paper Series 1013, European Central Bank.
    11. Moosa, Imad A., 1997. "Testing the long-run neutrality of money in a developing economy: the case of India," Journal of Development Economics, Elsevier, vol. 53(1), pages 139-155, June.
    12. Hondroyiannis, George & Papapetrou, Evangelia, 2006. "Stock returns and inflation in Greece: A Markov switching approach," Review of Financial Economics, Elsevier, vol. 15(1), pages 76-94.
    13. James B. 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.
    14. Ashra, Sunil & Chattopadhyay, Saumen & Chaudhuri, Kausik, 2004. "Deficit, money and price: the Indian experience," Journal of Policy Modeling, Elsevier, vol. 26(3), pages 289-299, April.
    15. Laurence Boone & Benoît Mojon, 1998. "Sacrifice Ratios in Europe: a Comparison," Working Papers 1998-07, CEPII research center.

    More about this item

    Keywords

    Fisher Effect; Long Run; Lucus Critique; Neutrality; Phillips Curve; Superneutrality; Unit Roots; Vector Autoregressions;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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