Testing monetary neutrality with respect to relative price of oil using divisia M4

Jungho Baek, James Lee Caton and Dragan Miljkovic

The Quarterly Review of Economics and Finance, 2025, vol. 101, issue C

Abstract: In classical macroeconomic thought, monetary neutrality represents the theoretical baseline. The framework asserts that, in the long-run, nominal factors do not impact real factors. However, classical macroeconomics has little to say about the composition of productive capital. This has been of less concern to modern economists, but it was of particular concern to pre-Keynesian macroeconomists. Irving Fisher recognized that monetary factors may lead to short-run distortions of relative prices. Despite this recognition, the traditional macroeconomic framework allows for no consideration of persistent relative price distortions. We investigate presentations of macroeconomic theory where such distortions are considered or are at least possible. We leverage the fact that monetary equilibrium does not imply general equilibrium and that transaction costs make reassertion of the initial capital allocation unlikely. We empirically detect persistent distortions in the relative price of oil that suggest that monetary factors generate persistent distortions in capital structure.

Keywords: Monetary neutrality; Monetary economics; Relative price of oil; Structural change (search for similar items in EconPapers)
JEL-codes: C32 E4 L16 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:101:y:2025:i:c:s1062976925000195

DOI: 10.1016/j.qref.2025.101978

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