SSE/EFI Working Paper Series in Economics and Finance
No 441:
Stronger evidence of long-run neutrality: a comment on Bernanke and Mihov
Paolo Giordani ()
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; (follow links to similar papers)
JEL-Codes: E31; E52; E58; (follow links to similar papers)
12 pages, May 2, 2001, Revised May 11, 2001
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