Empirical evidence on the non-neutrality of money from macroeconomic data

Abstract

This chapter provides a very brief survey of the empirical literature investigating monetary neutrality using macroeconomic time-series data. The main purpose of this chapter is to show that the issue of monetary non-neutrality is controversial and to provide some explanations for this state of affairs.

“In the short run, which may be as long as three to ten years, monetary changes primarily affect output. Over decades, on the other hand... the rate of monetary growth primarily affects prices... One major finding has to do with severe depressions. There is strong evidence that a monetary crisis, involving a substantial decline in the quantity of money, is a necessary and sufficient condition for a major depression.“

Milton Friedman (1989: 32)

“The observation that money changes induce output changes in the same direction receives confirmation in some data sets but is hard to see in others. Large-scale reductions in money growth can be associated with large-scale depressions or if carried out in the form of a credible reform, with no depression at all.“

Robert E. Lucas (1996: 668)

“... the evidence concerning whether monetary shocks have important real effects is controversial“

David H. Romer (1996: 241)