Empirical Evidence On Nominal Wage And Price Flexibility
This paper tests a necessary condition for the neutrality of money in a framework that imposes only weak restrictions on the money supply process. It extends B. Bernanke's (1986) work by weakening the set of just-identifying restrictions and by providing a statistical test of the overidentifying restrictions. Instead of specifying a structural model to identify primitive shocks, the author deduces the impact effects of structural money shocks under the neutrality hypothesis and then tests whether the system maintains neutrality as it propagates these impact effects. The tests reject neutrality for both the M1 and the monetary base. Copyright 1993, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
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