ASSESSING LONG-RUN MONEY NEUTRALITY IN MONETARY UNIONS

✍ Scribed by Andre Yone Haughton; Emma M. Iglesias

• Publisher: John Wiley and Sons
• Year: 2011
• Tongue: English
• Weight: 222 KB
• Volume: 18
• Category: Article
• ISSN: 1076-9307
• DOI: 10.1002/ijfe.455

✦ Synopsis

ABSTRACT

This paper analyses the issue of Long‐Run Money Neutrality in the Organization of Eastern Caribbean States (OECS) by using the European Monetary Union (EMU) and a group of other countries from the Caribbean as control groups. We employ several panel unit root and panel cointegration tests as robustness measures to support our results. First, we propose a methodology to test for longrun money neutrality in a panel data context. Second, we test for longrun money neutrality by using our proposed methodology, and other popular panel cointegration tests in the literature. Moreover, and contrary to the main literature on money neutrality, we disaggregate output in its various components, and we test for money neutrality in each of them. The results show that, at aggregate level of output, money is neutral for both control groups although mixed evidence exists for the main group of the OECS. The disaggregated level that is employed in this paper allows us to uncover important differences that otherwise are not observable at aggregated level. We conclude that in terms of government expenditure, consumption and exports, there is strong evidence that in monetary unions such as the EMU and the OECS, those variables are neutral to money, contrary to other countries that do not belong to a monetary union. Therefore, we find a clear difference between those countries that belong to a monetary union or not. Our results support the existence of a central bank in monetary unions as being beneficial in order to allow that increase in money supply has no influence on real economic variables in the long run. Copyright © 2011 John Wiley & Sons, Ltd.