Panel cointegration and the neutrality of money

Most econometric methods for testing the proposition of long-run monetary neutrality rely on the assumption that money and real output do not cointegrate, a result that is usually supported by the data. This paper argues that these results can be attributed in part to the low power of univariate tests, and that a violation of the noncointegration assumption is likely to result in a nonrejection of the neutrality proposition. To alleviate this problem, two new and more powerful panel cointegration tests are proposed that can be used under quite general conditions. The empirical results obtained from applying these tests to a panel covering ten countries between 1870 and 1986 suggest money and real output are cointegrated, and hence that the neutrality proposition must be rejected.      

On model ambiguity and money neutrality

We solve for the equilibrium of a stochastic neo-classical continuous time model without and with money under model ambiguity. We show that: (i) the correction for ambiguity stemming from the money supply is nil at equilibrium; (ii) money is neutral with respect to the stock market equilibrium (the equity risk premium); (iii) money is not neutral with respect to consumption and capital accumulation, and its effect may be quantitatively substantial; (iv) the preference for model robustness affects all the real economic variables as well as the expected inflation rate and the nominal interest rate.     

Taxation,rational expectations,and the neutrality of money

When progressive taxation of nominal income is introduced into a Barro-type monetary model with rational expectations, money may not be neutral even in the long run. In the short run, unanticipated money changes may cause output and prices to move either in the same or in opposite directions. The implications of this model are consistent with both the traditional inflation-output trade-off and the more recent phenomenon of “stagflation.”     

Some further evidence on the long-run neutrality of money

A recently developed reduced-form test for long-run neutrality is applied to twentieth-century Australian data on real output and the nominal money stock. The results show that narrowly defined money is neutral. However, real output is not invariant in the long run to a broader-based measure of the money stock.     

On labour mobility and the neutrality of money in unionised economies

A recent literature suggests that when wage setters are non-atomistic, strategic interaction between trade unions and the central bank may cause the monetary regime to matter for the labour market outcome, see Cukierman and Lippi (1999), Soskice and Iversen (2000), Vartiainen (2002), Holden (2003), Lippi (2003), Corricelli et al. (2006), Gnocchi (2006) and references therein. I show that when perfect labour mobility is introduced in a game between large wage setters and the central bank in a small open economy, the monetary regime is of no importance for real wages, employment or profits. The result suggests that if labour mobility is sufficiently high, worker migration is likely to mitigate the labour market effects of monetary regimes over time.     

Testing for short-run money neutrality in a small open economy: The case of Canada

This paper adopts an econometric methodology which is based on standard nested-hypotheses testing in order to test the policy ineffectiveness proposition in the context of the Canadian economy. It thus avoids some problems associated with the non-nested hypotheses framework used by Barro and numerous other writers. The substantial openness of the Canadian economy is taken into account through the use of a Mundell-Flemming aggregate demand side. The supply response of the economy is carefully modelled, in the same context, and the familiar Sargent-Wallace aggregate supply function is derived as a special case of a more general Keynesian function — by assuming instantaneous adjustment of prices to costs. Empirical tests based on a data sample spanning the period of Canada's recent experience with flexible exchange rates are unfavorable to the policy ineffectiveness proposition.     

Industrial policy and the neutrality of the state

Some insights from recent debates on the Marxian theory of the state are applied to the analysis of state intervention in production in liberal democratic capitalist societies. It is argued that such industrial policies tend to undermine the apparent neutrality both of the state and of the market as a mechanism for the allocation of resources.     

On the neutrality of fiscal policy

The paper explores the relationships between fiscal policy and real economic activity and prices for the six largest industrialized economies. Fiscal policy variables are shown to be consistent and rational functions of the behaviour of the economy. It is also confirmed that fiscal policy seems to have a consistent impact on subsequent real economic activity and prices. When multivariate time series analysis is used to breakdown overall fiscal policy into anticipated and unanticipated components, the anticipated components are shown generally to have just as much forecasting ability for subsequently realized economic variables as the unanticipated components. This does not appear to be consistent with the implications of pure rational expectations models.     

Testing of the rational expectations and structural neutrality hypotheses

In this paper we examine the tests of the new classical rational expectations and structural neutrality hypotheses undertaken by Leiderman (1980) using a model of money growth and unemployment for the United States developed by Barro (1977). Employing the data used in the studies by Barro and Leiderman we are able to construct an alternative model of money growth and unemployment against which the Barro-Leiderman model is rejected along with the joint hypothesis of rational expectations and structural neutrality.     

Net neutrality and asymmetric platform competition

Journal of Regulatory Economics - In this paper we analyze the interplay between access to the last-mile network and net neutrality in the market for Internet access. We consider two competing...     

Disequilibrium macroeconomics, money as a buffer stock and the estimation of money demand

Standard explanations of the seeming instability of the money demand in the post-1973 period usually link to stories about financial innovation and deregulation. I propose an alternative hypothesis: Much of the seeming instability occurs because of shifts in monetary policy, either explicit or implicit, in an environment where the Federal Reserve controls a more “exogenous” money stock. My econometric analysis modifies existing methods for estimating markets in disequilibrium and incorporates newly developed cointegration and error-correction modeling. My findings provide support for the buffer-stock interpretation of the money market.     

Endogenous uncertainty and the non-neutrality of money

Summary. We study some implications of the Theory of Rational Beliefs to monetary policy. We show that monetary policy in a Rational Beliefs environment can have an important effect on the characteristics of economic fluctuations. In Rational Beliefs Equilibria money is generically non-neutral unlike Rational Expectations Equilibria in which money is neutral and monetary policy is ineffective. Under Rational Beliefs Equilibria nominal prices and real output change not only in response to changes in the exogenous growth rate of money but also in response to changes in the state of beliefs. In Rational Beliefs Equilibria monetary shocks have real effects even when they are observed but are not fully anticipated. Furthermore, the non-neutrality of money results in a short run Phillips curve. When money “flutters, real output sputters” [8]. We show that Endogenous Uncertainty and the distribution of market beliefs are the major explanatory variables of such fluctuations. Under Rational Expectations monetary policy is ineffective because agents neutralize it by predicting correctly the effect of the policy. Under Rational Beliefs it is shown instead that inflation and recessions can be substantially aggravated by the distribution of market beliefs. Received: January 14, 2002; revised version: April 5, 2002 RID="*" ID="*" I would like to thank Mordecai Kurz for his constant help and support. Most of the ideas developed hereby have been inspired by innumerable and fruitful discussions with him. I have also greatly benefited from helpful comments by Stanley Black, Luigi Campiglio, Carsten Nielsen and Ho-Mou Wu. I also received valuable remarks from participants at the V meeting of “The Society for the Advancement of Economic Theory” held in Ischia, Italy, on July 2-8, 2001, where an initial draft of the present work was presented.     

Trading horizons and the value of money

This paper shows that fiat money can be feasible and essential even if the trading horizon is finite and deterministic. The result hinges on two features of our model. First, individual actions can affect the future availability of productive resources. So, agents may be willing to sell for money, even if on that date they have no reason to accept it. This makes monetary trade feasible in all preceding dates. Second, agents are anonymous and direct their search for partners. So, gift-giving arrangements may be prevented because agents can misrepresent their consumption needs. This makes money essential in exploiting any gains from specialization and trade.     

Endogenous money and the business cycle

The theory of endogenous money has tended to reduce to a debate over the slope of the LM. This is because endogenous money is a dynamic phenomenon, and its implications are masked in static models such as ISLM. This paper examines the role of endogenous money in credit-driven business cycles. A key distinction concerns that between bank and direct credit. The former is more expansionary because it involves creation of new money balances, whereas the latter involves transfer of existing money balances. The paper provides a simulation revealing instability emerges at a lower debt-income ratio as the share of bank debt in total debt rises.     

On the complementarity of money and credit

I propose a model where agents choose to conduct their business using two payment instruments, money and bilateral credit. A friction in the timing of transactions rationalizes the use of both instruments and makes it optimal for agents to use money as a means of settlement for credit. Money and credit complement each other. With anticipated inflation, complementarity implies that the credit to money ratio decreases with inflation.     

Revisiting the demand for money model: money and loans in selected manufacturing industries

Using a dynamic infinite horizon optimizing model, it is shown that the empirical demand for money equation employed by a generation of applied monetary researchers is a reduced form model of the dynamic Euler equations for real money balances. The Euler equations derived in this paper focus on the finance capital for the firm and consist of real money balances (M1) and real business loans (F1) for selected manufacturing industries. By employing explicit structural dynamic specification and sectoral disaggregation, the question of how firms close the gap between desired real money balances and actual real money balances is examined. Model consistent ‘desired’ levels of money balances and business loans are found to depend not only upon the usual transactions variable and interest rate but also upon relative prices and a technology index. Moreover, the speed in closing the gap between desired and actual money balances (loan balances) is estimated using annual two-digit Standard Industrial Code data for durable and non-durable industries. Non-durable industries tend to close the gap faster than durable industries by as much as 25% in a given year.