Extract
Long run neutrality of money in Mexico.
Introduction
Intuitively, it would seem that permanently changing the quantity of money in an economy should have no long run effect on real variables; absolute prices should change, but nothing more. (1) In such an economy money is long run neutral (LRN). Macroeconomic models with optimizing agents are usually characterized by LRN, although many do allow for short run non-neutrality from a wide variety of sources. Exactly how money affects output and other real variables in the short run is an unresolved issue, but the absence of long run neutrality in a modern macro model would be surprising. (2) Despite its theoretical appeal in mainstream economics, the empirical evidence regarding long run neutrality (LRN) of money is not conclusive. Fisher and Seater (1993, henceforth FS) show that long-run propositions like monetary neutrality, superneutrality, or purchasing power parity may, under certain circumstances, be tested using ordinary least squares regressions (OLS). (3) We use the FS methodology with bootstrapped errors to examine long run neutrality of money with respect to real GDP and real output in ten industrial sectors of the Mexican economy. Coe and Nason (2004, henceforth CN) have applied the OLS test of Fisher and Seater to data for Australia, Canada, the United Kingdom, and the United States. Using money and real output data for these four countries, they find that large size distortions characterize the FS test and that the power of the test is low. Indeed, in most of their OLS regressions, pow...See the full content of this document
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