An Econometric Investigation of the Monetary Neutrality and Rationality Propositions from an International Perspective

This study employs the methodology developed by Mishkin (1982) to test the Macro Rational Expectations (MRE) hypothesis in 6 countries: Canada, West Germany, Italy, Japan, the UK, and the US. This methodology allows testing of the joint hypothesis of rational expectations and anticipated monetary ne...

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Bibliographic Details
Published in:The review of economics and statistics 1982-11, Vol.64 (4), p.562-571
Main Authors: Hoffman, Dennis L., Schlagenhauf, Don E.
Format: Article
Language:English
Subjects:
Coefficients
Economic expectations
Economic stabilization
Economic theory
Growth
Hypotheses
Macroeconomic modeling
Manycountries
Mathematical procedures
Monetary policy
Money supply
Neutrality
Ratio test
Rational expectations
Rational expectations theory
Rationality
Statistical analysis
Statistical forecasts
Tests
Citations: Items that cite this one
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Summary:This study employs the methodology developed by Mishkin (1982) to test the Macro Rational Expectations (MRE) hypothesis in 6 countries: Canada, West Germany, Italy, Japan, the UK, and the US. This methodology allows testing of the joint hypothesis of rational expectations and anticipated monetary neutrality, as well as testing of these hypotheses individually. Findings with respect to the joint test are mixed; only for Canada and Italy is the joint hypothesis not rejected over the 2 lag length specifications considered. With respect to the individual hypotheses, the rational expectations hypothesis is rejected only for Germany when a lag of 7 periods is employed, and for Germany, Japan, and the US when a lag of 11 periods is used. The neutrality hypothesis has been proven inconsistent with the data for all countries except Canada. In sum, the results cast serious doubt on the MRE hypothesis and provide some empirical support for macroeconomic models in which monetary policy affects output due to the presence of rigidities either in the form of information lags or the temporary inflexibility of prices or wages.
ISSN:0034-6535
1530-9142
DOI:10.2307/1923940