Testing Long-Run Neutrality in Japan

Abstract

The simplest “long-run neutrality” proposition specifies that a permanent change of the money stock has no long-run consequences for the level of real output. King and Watson exhibited the basic framework of long-run neutrality. In this paper, we extend King & Watson’s method and succeed direct estimations of unknown parameters. We investigate the neutrality of (real GDP, M3) in Japan during (1980q1,2007q4), where M3 is a wider class of money than M2. We show that this interval rejects the neutrality to the positive direction.