The Money Neutrality Proposition: Is Boosting Money Supply A Solution To US Economic Problems?

Abstract

This paper unfastens the new classical structural model and broadens the reduced form output equation to investigate the money neutrality proposition in the United States. The hypothesis that any predictable monetary policy has no influence on output is extended by the inclusion of foreign exchange rationing to the supply side of the economy as cointegrated with money supply. The final prediction error determines the proper lag length that is used by the dynamic analysis to examine the causality relationship between imports, foreign price, foreign income, and output. The vector autoregressive is used to determine the exogeneity property of foreign exchange and output; it also helps extract the anticipated and unanticipated components of foreign exchange and money series. Empirical evidence provides considerable support for short run cyclical movements in the output of highly industrialized countries in affecting the real output in the United States. Indeed, any policy response in raising output should take into account the well-being of other developed countries. Predicted or not, an increase in the level of growth of other advanced countries does not leads to offsetting expectation and results in raising the economic growth. Empirical test presents no evidence that boosting the money supply leads to an increase in the level of growth. The result also refutes the view that the United States can quickly recover through a monetary policy aimed at depreciating the dollar and stands against the idea that devaluation tends to expand domestic output in industrialized countries. Incompatible with the economic logic is the lack of support of the apparent reality of output determination in industrialized countries open economy models.