Economic Quarterly

Summer 1997

Testing Long-Run Neutrality

Mark W. Watson and Robert G. King

Propositions about long-run neutrality are at the heart of macroeconomics. In the 1970s, Lucas and Sargent criticized traditional neutrality tests, suggesting that long-run propositions could not be tested without a detailed structural model. Yet, when nominal variables are integrated, long-run neutrality can be tested with limited structural information. Using a suitable econometric framework, we provide empirical tests of four long-run propositions: the neutrality of money, the superneutrality of money, the Fisher effect, and the vertical Phillips curve.

Our Research Focus: Inflation and Monetary Policy

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