IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

An Empirical Investigation of the Lucas Hypothesis: the Yield Curve and on Linearity in the Money-Output Relationship

Listed author(s):
  • Matteo Modena

Existing evidence about the effectiveness of money growth to stimulate economic activity has been criticized from different perspectives. In addition, high correlation between money and output is not helpful to detect the direction of causality. From a policy perspective, in fact, positive correlation may arise from two opposite policy conducts: either the monetary authority sets the supply of money to influence future output fluctuations, or the central bank controls money growth as a reaction to the recent evolution of macro variables. In this work the relationship between money and output is analysed within a non linear framework that ascribes a primary role to expectations. In particular, we find evidence that the Lucas (1973) hypothesis, that exists an inverse correlation between the variance of nominal shocks and the magnitude of output response to nominal shocks, is supported by data evidence when the yield curve is either flat or downward sloping. We also provide evidence suggesting that the Friedman (1977) hypothesis, that the variability of inflation exerts a negative effect on the natural level of output, holds when a positive risk premium is incorporated in an upward sloping term structure of interest rates.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2010_15.

in new window

Date of creation: May 2009
Date of revision: Jun 2010
Handle: RePEc:gla:glaewp:2010_15
Contact details of provider: Postal:
Adam Smith Building, Glasgow G12 8RT

Phone: 0141 330 4618
Fax: 0141 330 4940
Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:gla:glaewp:2010_15. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jeanette Findlay)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.