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The Lucas hypothesis on monetary shocks: evidence from a GARCH-in-mean model

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Abstract

In this paper, we review the Lucas hypothesis that the impact on real output to unanticipated nominal shocks is inversely related across countries to the variability of such shocks. In doing so, we model money supply volatility explicitly to capture important volatility effects that previous work has ignored. Using postwar data from 39 countries, we find empirical evidence in favor of the hypothesis. Our results are robust to data mining, alternative data frequencies, alternative measures of nominal shocks and monetary policy instruments, and alternative measures of the level of economic activity.

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Notes

  1. See, for example, Mascaro and Meltzer (1983), Evans (1984), Belongia (1984), Tatom (1984, 1985), McMillin (1988), Grier and Tullock (1989), Ramey and Ramey (1995), Grier and Perry (2000), among others.

  2. See, for example, Engle (1982), Bollerslev (1986), Kroner and Lastrapes (1993), Grier et al. (2004), Elder (2004), Serletis and Shahmoradi (2006), and others.

  3. See, for example, Dickey et al. (1991), Friedman and Kuttner (1992), and Miller (1991).

  4. The test is available in RATS Econometrics Software.

  5. We conducted the same tests in log levels of the variables and find that the null hypothesis of a unit root cannot be rejected at conventional significance levels for most of the countries.

  6. For a given country, we also conducted an F-test of the null hypothesis that the coefficients in the money supply equation are all zero, and the hypothesis is rejected at a conventional level of significance.

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Authors and Affiliations

  1. Department of Accounting and Finance, Texas A&M University-San Antonio, 2601 Louis Bauer Drive, San Antonio, TX, 78235, USA

    Sajjadur Rahman

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  1. Sajjadur Rahman
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Correspondence to Sajjadur Rahman.

Additional information

I would like to thank Apostolos Serletis, Robert Lucas at the University of Saskatchewan, Max Chaban, Andy Pollak, Pat Coe, Ana Maria Herrera, two anonymous referees, and seminar participants at the 88th WEAI annual conference in Seattle for helpful comments.

Appendix

Appendix

See Table 7.

Table 7 Estimates of variance equations
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Rahman, S. The Lucas hypothesis on monetary shocks: evidence from a GARCH-in-mean model. Empir Econ 54, 1411–1450 (2018). https://doi.org/10.1007/s00181-017-1270-1

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