Money neutrality: Rethinking the myth

Issaoui, Fakhri; Boufateh, Talel; Guesmi, Mourad

doi:10.2298/pan1503287i

Cited by 6 publications

(10 citation statements)

References 22 publications

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“…An interesting comparative study for developed and developing economies was proposed by Issaoui et al, who applied a structural vector error correction (SVEC) model to a comparative research on the United States, Morocco and Gabon for the years 1960-2011 in the case of the US and Morocco, and 1962-2011 for Gabon (Issaoui et al 2015). They examined the long-term relationship among money supply (M2), income (GDP), and prices (CPI).…”

Section: Review Of Previous Empirical Research For Highly Developed Amentioning

confidence: 99%

The Impact of Money on Output in Czech Republic and Romania

Simionescu¹,

Balcerzak

Bilan

et al. 2018

Journal of Business Economics and Management

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Abstract. The problem of relationship between output and money has become again a subject of special interests of economists after the most recent global financial crisis and monetary stabilization policies applied by central banks of almost all developed economies. In this context, the main aim of this paper is to assess the relation between GDP and the most important monetary variables in two countries: Romania and Czech Republic over the period of 1995:Q1 -2015:Q4. The choice of these economies was deliberate. The selected countries are different from the viewpoint of rate and results of transformation from the centrally planned to market economy, which have influenced their current economic environment stability. Czech Republic is currently classified as middle or even developed country, whereas Romania is still considered as a developing economy. Thus, differences between these two countries make them interesting in the case of comparative studies. In the empirical part of our research the vector error correction models (VECM) were applied. The main findings of the article are the following: in Romania, there is a short-run causality from money supply (M3) to GDP and a long-run relationship between GDP, internal credit and M3. According to Granger causality test, the rate of M3 in Romania was a cause for economic. In Czech Republic, there is a short-run causality from M3 to GDP and a long-run causality between GDP, internal credit and M3. Thus, the results contradict the money neutrality hypothesis in post-transformation Central European economies.

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Section: Review Of Previous Empirical Research For Highly Developed Amentioning

confidence: 99%

The Impact of Money on Output in Czech Republic and Romania

Simionescu¹,

Balcerzak

Bilan

et al. 2018

Journal of Business Economics and Management

View full text Add to dashboard Cite

show abstract

“…On this point, Nilss Olekalns (1996) empirically reports that narrowly defined money is neutral but a broader measure of the money stock is not. In the case of developing countries, Issaoui, Boufateh, and Guesmi (2015) emphasize the absence of the production capacity rather than price flexibility in explaining why the increase in money supply is completely channeled into inflation. On the contrary, in developed countries, non-neutrality can appear because of the interactions of money and production.…”

Section: The Dynamic Optimization Modelmentioning

confidence: 99%

“…One can use it in interpretation of Equation (11), that is, as long as sector j's nominal interest rate , is different from the economy-wide nominal interest rate, , each financial asset has different impact on consumer's decisions. As Issaoui, Boufateh, and Guesmi (2015) claims, relative abundance of information in developed countries can render each sector's real rate of return visible and distinguishable from each other, which leads to the non-neutrality of liquidity, a possible theoretical and financial background behind the capacity of production systems in Issaoui, Boufateh, and Guesmi (2015).…”

Section: The Dynamic Optimization Modelmentioning

confidence: 99%

“…Only one aggregate capital is found to be one of the reasons there has been a history-long dichotomy between financial and real sectors. Further, a model with only one aggregate capital is more suitable for analyzing developing countries where responses in financial markets are relatively delayed due to various reasons like information deficiency and relatively small capacity of production systems that is not able to properly respond to increases in money supply as shown in Fakhri Issaoui, Talel Boufateh, and Mourad Guesmi (2015). On the other hand, Issaoui, Boufateh, and Guesmi (2015) argue that in developed countries, the capacity of production systems reacts to excessive money supply by creating more wealth and that developed countries tend to be more responsive to monetary transmission mechanisms.…”

mentioning

confidence: 99%

“…Further, a model with only one aggregate capital is more suitable for analyzing developing countries where responses in financial markets are relatively delayed due to various reasons like information deficiency and relatively small capacity of production systems that is not able to properly respond to increases in money supply as shown in Fakhri Issaoui, Talel Boufateh, and Mourad Guesmi (2015). On the other hand, Issaoui, Boufateh, and Guesmi (2015) argue that in developed countries, the capacity of production systems reacts to excessive money supply by creating more wealth and that developed countries tend to be more responsive to monetary transmission mechanisms. Certainly, it would be controversial to praise the production capacity in developed countries given the subprime mortgage crisis and delinked financial sector from the real sector, but it is worth explaining what the responses in financial markets really mean and how they are related to neutrality or non-neutrality.…”

mentioning

confidence: 99%

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Another reason for non-neutrality of financial liquidity

Lee

2019

Panoeconomicus

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This paper reinterprets the non-neutrality of financial liquidity under a general equilibrium model with multiple financial liquidities, but without price stickiness. Non-neutrality opens the possibility of effective monetary or financial policy on the crisis-prone real economy and thus revisiting its nature is worthwhile. We find that models with only one asset and money limit our perspectives to see the nature of financial liquidities interacting with real economy. Departing from abstracting an economy with only one interest rate allows us to see the underlying reason of non-neutrality of financial liquidities, that is, industry-specific rates of return distinguishable from the representative rate of return. Without the assumption of price stickiness but with a wider frame of multiple liquidities, this paper offers another reason for non-neutrality of financial liquidity and naturally clarifies the meaning of money neutrality. We incorporate complicated reality of multiple financial liquidities in a theoretical model, which is a way of deepening our understanding of financial market.

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Testing the long-run neutrality and superneutrality of money in a developing country: Evidence from Iran

Iranmanesh

Jalaee

2021

MethodsX

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This paper investigates the long-run money neutrality (LMN) and long-run money superneutrality (LMSN) hypothesis for both the industry sector and the entire Iranian economy by using the data of 1979–2018 and applying Fisher and Seater's (1993) ARIMA framework. Conventional unit root tests, including PP, ADF, and KPSS, are applied to determine the order of integration of variables; however, since the structural break in variables is not considered in these methods, Lee-Strazicich and Zivot-Andrews methods are also applied to take it into account. The findings of money neutrality investigation in the Iranian industry sector show that when the monetary base is the criterion, money neutrality is confirmed, but when liquidity and money volume are the criteria, money neutrality is rejected. Also, the neutrality of money is accepted considering all three monetary aggregates (M1, M2, and M3) in investigating the entire economy. It is not feasible to examine the superneutrality of money since unit root tests confirm that all the variables are I (1). As there is more than one structural break in the time series of the study, applying the Lee-Strazicich unit root test has made the results more reliable. Neutrality of money testing is not efficient in the case of cointegration between model variables. Thus, the Gregory-Hansen test, which investigates cointegration considering the structural break, is applied. The results of this research can guide policy-makers. Non-neutrality of money in the industrial sector shows the positive effect of monetary policy on this sector when considering the probability of destructive effects on other sectors.

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Money neutrality: Rethinking the myth

Cited by 6 publications

References 22 publications

The Impact of Money on Output in Czech Republic and Romania

The Impact of Money on Output in Czech Republic and Romania

Another reason for non-neutrality of financial liquidity

Testing the long-run neutrality and superneutrality of money in a developing country: Evidence from Iran

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