DP1042 Testing Long-run Neutrality: Empirical Evidence for G7 Countries with Special Emphasis on Germany

Author(s): Axel A Weber
Publication Date: October 1994
Keyword(s): Fisher Effect, Long Run, Lucus Critique, Neutrality, Phillips Curve, Superneutrality, Unit Roots, Vector Autoregressions
JEL(s): E31, E43, E52
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1042

Modern neo-Keynesian, new classical, and real business cycle models typically differ in the degree to which they incorporate long-run or short-run neutrality propositions. Despite their importance, little firm international evidence on the validity of these neutrality hypotheses is available to date. This paper applies a bivariate VAR approach to test the long-run restrictions implied by a number of neoclassical neutrality propositions. The evidence from the G7 countries appears to be consistent with the long-run neutrality of money and the vertical Phillips curve, but the data largely refute the long-run super-neutrality of money and the `Fisher effect' of inflation on interest rates.