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Additional econometric tests of the policy ineffectiveness proposition

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Date
1989-08
Author
Shammout, Luai Amin
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Abstract
This study develops a methodology for empirically analyzing rational expectations models displaying the neutrality result and then applies it to the important question of whether anticipated monetary policy matters to the business cycle. The study contains a review of literature in rational expectations theory, as well as its policy implications. A vector autoregressive (VAR) estimation technique is employed to test the hypothesis of whether anticipated monetary policy matters. The procedure used in this study amounts to running multivariate Granger tests. However, the issue here is the predictive content of information, which is what Granger tests are really meant to analyze, and it does not involve the tricky concept and issue of economic causality. Empirical results affirm the alternative hypothesis that combines long-run monetary neutrality with the gradual adjustment of money supply in the short run. However, this study fails to combine long-run monetary neutrality with the gradual adjustment of prices. A Chow test has been performed in order to test for any structural change in the model over time. A test over two equal subperiods proves the stability of coefficients, and hence, the data can be pooled. However, a test over the post-1979 data proves that 1979 was a turning point, and hence, the economy experienced a shift in structure in 1979 which was due to changing operating procedure by the Federal Reserve System. Given this study's main results, we believe that anticipated monetary policy does matter, and hence, there is room for stabilizing monetary policy. A variety of applications to this study has been discussed, mainly in the areas of financial market behavior, interest rates and stock market prices.
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http://hdl.handle.net/2346/18502
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