Long‐run monetary neutrality and long‐horizon regressions

Patrick J. Coe · James M. Nason

30 citations0/0 files storedJournal of Applied Econometrics

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Monetary Policy and Economic Impact Economic Theory and Policy Economic theories and models

Abstract

Abstract A prominent test of long‐run monetary neutrality (LRMN) involves regressing long‐horizon output growth on long‐horizon money growth. We obtain limited support for LRMN with this test in long‐annual Australian, Canadian, UK and US samples. Although empirical confidence intervals yield evidence in favour of LRMN, Monte Carlo experiments reveal the power of this test is near its size. Thus, this test is unlikely to detect important deviations from LRMN. These problems arise because the long‐horizon regression test of LRMN relies on estimates of the covariance of long‐horizon output growth and long‐horizon money growth. Copyright © 2004 John Wiley & Sons, Ltd.

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References

1976Econometric policy evaluation: A critique 1994Automatic Lag Selection in Covariance Matrix Estimation 1999Monetary Theory and Policy 1992Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement 1992An Improved Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimator 1982Monetary Trends in the United States and the United Kingdom 1993Predictable Stock Returns: The Role of Small Sample Bias 1996Nobel Lecture: Monetary Neutrality

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