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The Lucas hypothesis on monetary shocks: evidence from a GARCH-in-mean model

Sajjadur Rahman ()
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Sajjadur Rahman: Texas A&M University-San Antonio

Empirical Economics, 2018, vol. 54, issue 4, 1411-1450

Abstract: Abstract In this paper, we review the Lucas hypothesis that the impact on real output to unanticipated nominal shocks is inversely related across countries to the variability of such shocks. In doing so, we model money supply volatility explicitly to capture important volatility effects that previous work has ignored. Using postwar data from 39 countries, we find empirical evidence in favor of the hypothesis. Our results are robust to data mining, alternative data frequencies, alternative measures of nominal shocks and monetary policy instruments, and alternative measures of the level of economic activity.

Keywords: Volatility of money growth; GARCH-in-mean model (search for similar items in EconPapers)
JEL-codes: E32 C32 (search for similar items in EconPapers)
Date: 2018
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