Working Papers,
Lund University, Department of Economics

Abstract: 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 very general conditions. The tests are then applied to a panel covering 10 countries between 1870 and 1986. The results suggest money and real output are cointegrated, and that the neutrality proposition therefore must be rejected.

Keywords: Monetary Neutrality; Panel Cointegration Testing

JEL-codes: C12; C22; C23; E30; E50

27 pages, August 9, 2006

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Published as

Joakim Westerlund and Mauro Costantini, (2009), 'Panel Cointegration and the Neutrality of Money', Empirical Economics, vol 36, pages 1-26

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