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Long-run monetary neutrality under stochastic and deterministic trends

Daniel Ventosa-Santaulària () and Antonio Noriega ()

Economic Modelling, 2015, vol. 47, issue C, 372-382

Abstract: This paper studies long-run monetary neutrality when long-horizon regressions (LHR) are used as a vehicle to test it. We assume that money and/or output can be generated according to widely used persistent models. We combine these specifications and study the divergence rate of the t-statistic as an indication of a spurious relationship between money and output, and show that the presence of spurious evidence of non-neutrality is highly likely. We then propose a correct inferential procedure for testing the null hypothesis of no relationship in a LHR (finite-sample and asymptotic evidence supports the procedure). The latter is then applied to an international data set on money and output in order to test for long-run monetary neutrality. We find that neutrality holds for all countries.

Keywords: Long-run monetary neutrality; LHR; Trending variables; Structural breaks (search for similar items in EconPapers)
Date: 2015
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