Assessing long-run money neutrality in monetary unions

Haughton, Andre and Iglesias, Emma

Andre Yone Textron Haughton

International Journal of Finance & Economics

2013

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Europe ; Caribbean Area ; Studies ; Cointegration Analysis ; European Monetary Union ; Monetary Policy ; Central Banks ; Money Supply ; Western Europe ; Latin America ; Experiment/Theoretical Treatment ; Economic Policy & Planning ; Monetary Authorities-Central Bank

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This paper analyses the issue of Long-Run Money Neutrality in the Organization of Eastern Caribbean States (OECS) by using the European Monetary Union (EMU) and a group of other countries from the Caribbean as control groups. The authors employ several panel unit root and panel cointegration tests as robustness measures to support their results. The results show that, at aggregate level of output, money is neutral for both control groups although mixed evidence exists for the main group of the OECS. The authors conclude that in terms of government expenditure, consumption and exports, there is strong evidence that in monetary unions such as the EMU and the OECS, those variables are neutral to money, contrary to other countries that do not belong to a monetary union. Their results support the existence of a central bank in monetary unions as being beneficial in order to allow that increase in money supply has no influence on real economic variables in the long run.

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