SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

Abstract: Few propositions in macroeconomics are less controversial than long-run money neutrality, yet clear and robust empirical support has not been found in time series studies. Bernanke and Mihov (1998) are comparatively successful in this hunt, but their output response to monetary policy shocks remains stubbornly persistent. This paper argues that the omission of a measure of output gap from the VAR estimated by Bernanke and Mihov lies at the heart of this ''excessive'' persistence. In the theoretical framework of a New Keynesian model similar to that of Svensson (1997) and Clarida, Gali and Gertler (1999), I prove that this omission induces persistence overestimation under relatively mild assumptions. The inclusion of a proxy for the output gap in the VAR is then shown to drastically increase the evidence for long-run money neutrality on US data, as predicted by the theoretical analysis.

Keywords: long-run money neutrality; technology shocks; output gap; VAR misspecification

JEL-codes: E31; E52; E58

12 pages, First version: May 2, 2001. Revised: May 11, 2001.

Full text files

hastef0441.pdf  Full text

Download statistics

• Stockholm School of Economics
• Home page for this series

Questions (including download problems) about the papers in this series should be directed to Helena Lundin ()
Report other problems with accessing this service to Sune Karlsson ().

RePEc:hhs:hastef:0441This page generated on 2024-09-13 22:19:41.