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

Axel A Weber

No 1042, CEPR Discussion Papers from Centre for Economic Policy Research

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.

Keywords: Fisher Effect; Long Run; Lucus Critique; Neutrality; Phillips Curve; Superneutrality; Unit Roots; Vector Autoregressions (search for similar items in EconPapers)
JEL-codes: E31 E43 E52 (search for similar items in EconPapers)
Date: 1994-10
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Citations: View citations in EconPapers (48)

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