Is monetary policy really neutral in the long-run? Evidence for some emerging
and developed economies
Reginaldo Pinto Nogueira Jr.
Fundação João Pinheiro, Brazil
Abstract
The traditional economic theory suggests that changes in the money supply or in the interest rates can influence the
business cycle, but not the long-run potential output. In other words, monetary policy is neutral over the long-run. In
this paper we use some new developments in econometrics to test for the existence of a long-run relationship between
the monetary policy instrument used by most Central Banks – short-term interest rates – and real output. Using annual
data for 14 emerging and developed countries our results offer overall support for the traditional economic theory.

Is monetary policy really neutral in the long-run? Evidence for some emerging and developed economies

Reginaldo Pinto Nogueira Jr. - Fundação João Pinheiro, Brazil

Abstract

The traditional economic theory suggests that changes in the money supply or in the interest rates can influence the business cycle, but not the long-run potential output. In other words, monetary policy is neutral over the long-run. In this paper we use some new developments in econometrics to test for the existence of a long-run relationship between the monetary policy instrument used by most Central Banks – short-term interest rates – and real output. Using annual data for 14 emerging and developed countries our results offer overall support for the traditional economic theory.