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Long-Run Neutrality in a Long-Memory Model

  • SangKun Bae

    (Korea Institute for Industrial Economics and Trade)

  • Mark J. Jensen

    (University of Missouri - Columbia)

In this paper we use a bivariate, fractionally integrated, autoregressive, moving average model of money and real output to extend Fisher and Seater (1993) long-run neutrality requirements to long-memory processes. We derive new restrictions on the order of the nominal and real variable and discuss their implications when long-run neutrality is tested with a reduced form econometric model. These new restrictions show how finding money to be nonstationary is not sufficient for testing long-run neutrality. A long-memory process can be both nonstationary and mean reverting, meaning an exogenous monetary shock has no long-run effect on money if it is such a process. We also use the fractionally integrated, autoregressive, moving average model to estimate and test the order of integration of money and real output. Since unit root tests have low power against long-memory processes, directly estimating the differencing parameter is more robust to the presence of short and long- memory. Lastly, we apply our long-memory framework to a century worth of annual money supply and real output data for Argentina, Australia, Canada, Italy, Sweden, the UK, and the US and discover that long-run neutrality is testable in six of the seven countries and holds in five of the six countries.

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File URL: http://econwpa.repec.org/eps/mac/papers/9809/9809006.ps.gz
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Paper provided by EconWPA in its series Macroeconomics with number 9809006.

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Length: 23 pages
Date of creation: 14 Sep 1998
Date of revision: 30 Sep 1998
Handle: RePEc:wpa:wuwpma:9809006
Note: Type of Document - Postscript; prepared on UNIX Ultra TeX; to print on Postscript; pages: 23 ; figures: included in document
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Serletis, Apostolos & Krause, David, 1996. "Empirical evidence on the long-run neutrality hypothesis using low-frequency international data," Economics Letters, Elsevier, vol. 50(3), pages 323-327, March.
  2. Francis X. Diebold & Glenn D. Rudebusch, 1990. "On the power of Dickey-Fuller tests against fractional alternatives," Finance and Economics Discussion Series 119, Board of Governors of the Federal Reserve System (U.S.).
  3. Jensen, Mark J, 1999. "Using wavelets to obtain a consistent ordinary least squares estimator of the long-memory parameter," MPRA Paper 39152, University Library of Munich, Germany.
  4. Sowell, Fallaw, 1992. "Modeling long-run behavior with the fractional ARIMA model," Journal of Monetary Economics, Elsevier, vol. 29(2), pages 277-302, April.
  5. 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.
  6. Mark J. Jensen, 1997. "An Alternative Maximum Likelihood Estimator of Long-Memeory Processes Using Compactly Supported Wavelets," Econometrics 9709002, EconWPA.
  7. Fisher, Mark E & Seater, John J, 1993. "Long-Run Neutrality and Superneutrality in an ARIMA Framework," American Economic Review, American Economic Association, vol. 83(3), pages 402-15, June.
  8. Robert King & Mark W. Watson, 1992. "Testing Long Run Neutrality," NBER Working Papers 4156, National Bureau of Economic Research, Inc.
  9. Serletis, A & Moustas, Z, 1997. "International Evidence on the Neutrality of Money," Papers 9704, Calgary - Department of Economics.
  10. Sowell, Fallaw, 1992. "Maximum likelihood estimation of stationary univariate fractionally integrated time series models," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 165-188.
  11. Sargent, Thomas J, 1971. "A Note on the 'Accelerationist' Controversy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 3(3), pages 721-25, August.
  12. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
  13. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  14. Sowell, Fallaw, 1990. "The Fractional Unit Root Distribution," Econometrica, Econometric Society, vol. 58(2), pages 495-505, March.
  15. Canova, Fabio, 1994. "Testing long-run neutrality: Empirical evidence for G7-countries with special emphasis on Germany A comment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 119-125, December.
  16. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
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