Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2006:18: Panel Cointegration and the Neutrality of Money

Joakim Westerlund () and Mauro Costantini ()
Additional contact information
Joakim Westerlund: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Mauro Costantini: Department of Public Economics, Postal: Department of Public Economics, University of Rome "La Sapienza", Via Del Castro Laurenziano 9, 00161 Roma, Italy

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

Download statistics

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

This page generated on 2021-11-03 13:30:09.