Geweke

The Superneutrality of Money in the United States: An Interpretation of the Evidence
Author(s): John Geweke

Source: Econometrica, Vol. 54, No. 1 (Jan., 1986), pp. 1-21
Published by: The Econometric Society
Stable URL: http://www.jstor.org/stable/1914154 .
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ECONOMETRICA
VOLUME 54 January, 1986 NUMBER 1
THE SUPERNEUTRALITY OF MONEY IN THE UNITED STATES:

AN INTERPRETATION OF THE EVIDENCE'
BY JOHN GEWEKE
Structural and stochastic neutrality have refutable implications for aggregate economic
time series only in conjunction with other maintained hypotheses. Simple and commonly
employed maintained hypotheses lead to restrictions on measures of feedback and their
decomposition by frequency. These restrictions also suggest an empirical interpretation of
the notional long and short runs. It is found that a century of annual U.S. data, and postwar
monthly data, consistently support structural superneutrality of money with respect to
output and the real rate of return and consistently reject its superneutrality with respect
to velocity. A quantitative characterization of the long run is suggested.
1. INTRODUCTION
IN STATIC MODELS neutrality is defined as the condition that alternative values

for a first set of exogenous variables x be consistent with unchanged values for
a second set of endogenous variables y [3, p. 369; 16, pp. 42-43]. There is no
single, obvious extension of this idea to stochastic dynamic models of economic
time series. One applied widely in recent years is stochastic neutrality [16, pp.
357-359], in which a set of variables y, depends on a set of variables x, only
through current and lagged values of the innovations (?,-S - Et -(xtOc ) j > s ? 0)
in xt. An alternative extension is implicit in the routine simulation of conventional
econometric models and in the definition of the total multiplier [10]. Suppose
the structural equations of the model are
H*(L) G*(L) yt Pt
var =T*
C*1 T*
where B*(L), E*(L), etc., are polynomials in the lag operator L normalized by
E*(O) = I and G*(O) = I; and E* is serially uncorrelated. The equations in each
block are expressed in reduced form, but each block remains structural with
respect to interventions in the other block. The first block of equations determines
x, given current and past yt and disturbances u,, and the second block determines
y, given current and past xt and disturbances vt. This is equivalent to the
'This work had the benefit of helpful discussions with Mark Gertler, Bennet McCallum, Kenneth
Singleton, and George Tauchen, who bear no responsibility for the confusion that may remain.
Detailed comments from Mary McGarvey and two anonymous referees have substantively improved
the paper. Financial support was provided by NSF Grant SES8005603 and the Sloan Foundation.
Luke Froeb, Suk Kang, Bernd Luedecke, and Mike Zwecker provided research assistance at various
points.

2 JOHN GEWEKE
assumption that B*(L)-', E*(L)-', and G*(L)-l exist and have convergent
expansions in nonnegative powers of L We shall say that the variables x, are
structurally neutral with respect to y, if H*(1) = 0, that is, the total multiplier in
x, with respect to yt is zero.
Structural and stochastic neutrality share two important characteristics. Neither
is refutable by itself: (1.1) requires identifying restrictions, and Sargent [15] first
pointed out the observational equivalence of stochastic neutrality and non-
neutrality. Both extend the notion of neutrality in static models. If xt is stochasti-
cally neutral with respect to yt and the mean of xt is changed (but not because
of a change in the mean of yt and feedback to xt) then the mean of Yt must
remain unchanged, since E[x,_s - Et_(xts)] =0. If the mean of ut is changed
in (1.1) and the second block of equations is structural with respect to this kind
of intervention, then E(yt) remains the same. On the other hand the two concepts
clearly are quite different, as McCallum [13] has emphasized at some length.
This paper has two empirical objectives. The first is to test the superneutrality
of money [21, pp. 206-207]-the proposition that the growth rate in money is
structurally neutral with respect to real macroeconomic variables-under broad
maintained hypotheses. The intention is to embed the proposition of structural
superneutrality in a maintained model in which we have the greatest prior
confidence. We are attempting, insofar as possible, to set up a situation in which
formal rejection of the null hypothesis is most plausibly interpreted as rejection
of superneutrality and not rejection of ancillary maintained hypotheses. The
paper's second empirical objective is to provide an empirical counterpart for the
elusive "long run" of economic theory that is consistent with the data. In meeting
these objectives two new methodological devices are employed. First, we show
how measures of feedback between time series and the decomposition by
frequency developed in [7] are related to structural neutrality and to the somewhat
elusive notions of "long run" and "short run." The relationship between structural
neutrality and feedback at frequency zero is explored in the next section. In
Section 3 it is shown that the measure of feedback at a given frequency summarizes
the outcome of a hypothetical experiment undertaken with a replication of
economies to determine the extent to which short or long run fluctuations in one
group of variables are reflected in another. The second methodological innovation
in the paper is the use of a variant of Efron's [4, Section 5.2] parametric bootstrap
in an effort to increase the reliability of inference from vector autoregressions.
This leads to new estimation techniques, discussed in Section 4.
The empirical portion of the paper reports tests of the structural neutrality of
the growth rate in money with respect to the growth rate of output, the growth
rate of real balances, and the real interest rate. The work is undertaken with the
annual series of Friedman and Schwartz for three long subintervals of the
1870-1970 period, and with monthly postwar series, for the United States. The
results provide strong support for the structural superneutrality of money with
respect to output measures and real interest rates in all periods of U.S. economic
history. There is substantial evidence against the structural superneutrality of
money with respect to velocity.

SUPERNEUTRALITY OF MONEY 3
2. MEASLJRES OF FEEDBACK AND STRUCTURAL NEUTRALITY
With further identifying restrictions (1.1) determines the autoregressive rep-

resentation for z, which can be normalized in various ways. The standard
normalization is
E
(2.1) B(L)z, (L) F(L) |-, = |t Et
H (L) G (L) Yt Pt
var -= Y,
Pt, C' T
with B(O)= L This representation provides the linear projection of zt on its own
past. We shall assume, in all of what follows, that {z,} satisfies the regularity
conditions set forth in detail in Section 2 of [7]: the process is wide sense stationary,
has a moving average representation with square summable coefficients, and has
a spectral density matrix whose eigenvalues are uniformly bounded above and
below almost everywhere. The further assumption that the autocovariance func-
tion of {z,} is absolutely summable will guarantee that a continuous spectral
density for {z,} exists [2, p. 476]; this is required to interpret population charac-
teristics of {z,}, like spectral density and feedback, and their estimates, at
individual frequencies.
One of two possible normalizations recursive in x, and y, is
(2.2) B+(L)z,= ++(L) F+(L) |t = | +

H4(L) G L)yr Pt
yr- + 0
var + =Y
pt 0 T
E+(O) = I, G+(O)= I, H+(O) = 0. This representation provides the linear projec-

tion of x, on its own past and current and past y,, and the linear projection of
y, on current and past x, and y,. The restrictions on (1.1) need not necessarily
satisfy either normalization, but all three are observationally equivalent.
Consider also standard vector autoregressive reprsentations for {x,} and {y,}
alone,
(2.3) C(L)x,=2 4, var(u,)= x, C(O)=Ik;
(2.4) D(L)y, = vP, var (v,) =T , D(O) =
x
The measure of linear feedback from Y to X is Fy x-ln (Il I/ l x 1) and that
from X to Y is Fx ln (IT"Il/lTj). These measures are nonnegative, and one
or the other being zero is equivalent to the existence of a Granger [11] or Sims
[17] unidirectional causal ordering. When Y is univariate, the fraction of the
variance in v-' which is expained by past X is pxy- exp (-Fx,). The
measure of instantaneous linear feedback is F. y = ln (ITj 121/1YI). The condi-
tions Fx. y = 0, C = 0, F+(O) = 0, and absence of instantaneous causality between
X and Y (in Granger's sense) are equivalent. When Y is univariate, the fraction
of variance in v, explained by current and past X (equivalently, the squared

4 JOHN GEWEKE
partial multiple correlation coefficient between y, and x, conditional on the entire

past of X and Y) is Px y 1 - exp (- Fx. y). The measure of linear dependence
between X and Y is Fx y ln (Ix x * Tyt/IYI), which is zero if and only if the
time series X and Y are uncorrelated at all leads and lags. Analogous to the
case for linear feedback, and with an interpretation given in [7], we may further
define Px y = 1 - exp (- Fx y). All three definitions are motivated by consideration
of the limiting values of likelihood ratio statistics for unidirectional causal
orderings, absence of instantaneous causality, and absence of correlation at all
leads and lags, respectively, when {Zt} is Gaussian. From these definitions,
(2.5) FX,Y = Fy,x + Fx, y + FXY
The measures of directional feedback Fyx and Fx, y may be decomposed
by frequency. We shall illustrate the decomposition for Fx, y, which begins with
the normalization (2.2). Observe that in this normalization all contemporaneous
effects are accounted for through F+(O) in the X equations, with H+(O)=
cov (v, u+) =0. The moving average representation corresponding to (2.2) is
-
(2.6) | B+(L) = R+(L) S+(L) |tv
Yt=Z
yr~~~~~~~~~~~~~~
Since cov(y+, vt) = 0,
(2.7) Sy(A) = R+(A) S+R+(A)'+ S+(A) T+S+(AY;
here Sy(A) denotes the spectral density matrix of {yt}, R+(A) the Fourier transform
of R+(L), and S+(A) the Fourier transform of S+(L), all at the frequency
A E [-I, ir]. The measure of feedback from X to Y at frequency A is f,,(A) =
In [ISy(Ak)I/IS+(A)T+S+(Ak)'I].This definition is motivated by consideration of the
limiting value of the likelihood ratio statistic for the hypothesis that variation in
{y,} at frequency A is attributable entirely to v+. It may be shown [7] that so
long as S+(L) (equivalently, E+(L)) is invertible,
(2.8) Fx, y =- f,Y(A ) dA.

2,7r _i
The decomposition of Fy,x proceeds in the same way, but begins with the
recursive normalization from X to Y instead of (2.2).
THEOREM 1: If (2.2) is structural, then X is structurallyneutral with respect to

Y if and only iffx,Y(O) = 0.
(Proofs are in an Appendix.)

The conditions H*(0) = 0, C*(0) = 0 are examples of restrictions without which
structural neutrality is untestable: in fact, the restrictions H*(1) = 0, C* = 0, are
just identifying in (1.1) [8, Theorem 1]. Since the choice of such restrictions can
be critical to the outcome of the test it seems desirable to keep them as simple
as possible. The restriction C* = 0 is assumed, impicitly or explicitly, whenever
the response of the variables in a model to a shock in a disturbance is traced.

This sort of experiment is common with structural models [10] and in the
interpretation of vector autoregressions [18]. Recursivity is the normalization
that makes the model appropriate for this class of conceptual experiments. A
choice like H*(O)=O requires somewhat more care, and may be less tenable.
With this motivation, consider requiring only that the structural model be recursive
without specifying the order.
DEFINITION: Suppose there exists a permutation of the rows and columns of

B*(O) which produces a lower triangular matrix. Suppose also that T* is diagonal.
Then B*( L)Z, = 4, var (4) Y is a fully recursive structural model.
In a fully recursive model all contemporaneous relations between X and Y

(conditional on past history) are attributed to coefficients of the structural
equations. The issue of attributing instantaneous feedback to a directional effect
is resolved a priori and it is natural to define F* =ln (ITyl/lT*), F* =
structural model F* y + F* =
THEOREM 2: In any fully recursive
Fx, YFy-x SF*-x Fy-x+Fx S
y,and yx >F*,y-, V Fxy+ Fx.
In a fully recursive structural model, dependence between X and Y(Fx,y) is

fully allocated to directional feedback (F*,y and F*,x). The measure of
instantaneous feedback Fx. - indicates the range of variation of F*x y and F* x
that is possible over the class of all fully recursive structural models. It is evident
that measures of feedback by frequencyf (A) and f (A) may be constructed,
and that
T
r
F* -=2 ff *(A) dA
27r _-,f-Y
so long as E*(L) is invertible. Theorem 2 cannot be extended directly to the
decomposition of feedback by frequency, but the following result is useful in
conjunction with Theorem 1.
THEOREM 3: Suppose that f* (A) = 0 for some fully recursive structural model.
Then f -V(A)--< FX-
Y-
This result is useful becausetyv (0) > Fx. y implies that there is no fully recursive
structural model characterized by structural neutrality of X with respect to Y.
Theorem 3 is thus an intermediate result between the fact that structural neutrality
per se is irrefutable from a single time series realization, and Theorem 1, which
shows the equivalence of structural neutrality and the absence of feedback at
A =0 in the specific case of (2.2). Results similar in spirit exist for stochastic
neutrality. By itself, stochastic neutrality has no implications for a single time
series realization [15], but as sometimes implemented in empirical applications,
it implies unidirectional Granger causality [14] and hence restricts measures of
feedback to zero.

6 JOHN GEWEKE
In summary, structural and stochastic neutrality have no refutable implications

ipsofacto. Only in conjunction with other assumptions-for example, recursivity
in the case of structural neutrality and constraints on lags in the case of stochastic
neutrality-do testable restrictionis emerge. These have been cast in terms of
measures of feedback, but they could also have been stated more conventionally
as restrictions on linear combinations of coefficients. Working with measures of
feedback has two advantages. The first is that it provides an escape from the
artifice of testing point null hypotheses. Since there is a one-to-one correspondence
between a measure of feedback and proportion of variance explained (which
obviously is restricted to lie between 0 and 1), there is a natural metric available
to judge the extent of departure from the null hypothesis. It becomes possible
to assess both the informativeness of the data and the likely departure from the
null hypothesis separately, which is not possible from a single test statistic and
very difficult at best from the coefficients of models or vector autoregressive
representations themselves. The second advantage of measures of feedback is
that they are closely related to the outcomes of hypothetical experiments of the
type discussed in the second section of this paper. We turn now to the development
of this relationship.
3. FEEDBACK AND THE LONG AND SHORT RUN
Comparative statics models are not intended to convey any but the most long
run properties, and sharp distinctions between long run and short run are not
natural to continuous-equilibrium dynamic models. However, there is a well-
defirned sense in which measures of feedback by frequency are amenable to
interpretation in terms of long run and short run properties of a model. Here we
shall describe a set of hypothetical experiments that might be undertaken with
a set of economies or models, that would reveal the same information that is
inherent in measures of feedback decomposed by frequency. The experiments,
in turn, plausibly correspond to what is commonly meant by the short run
properties of models or characteristics of economic behavior. These experiments
involve deterministic and artificial manipulations of the innovations in X and
Y, chosen not for their realism but for the fact that they elucidate important
properties of the model. They are artificial and useful as are the reactions of key
endogenous variables to transitory or permanent changes in exogenous variables
[10] or the response of variables in vector autoregressions to one-time-only shocks
to innovations [18]. In none of these cases is there any pretension that the result
of the experiment has anything to do with the way the world would behave if
the zero-probability event of an innovation following a cosine wave, or exogenous
variable exhibiting a purely transitory change, or an innovation changing once
in its entire realization were actually to occur. Rather, they provide useful means
of interpreting involved dynamics; the experiments here reveal the same properties
in a different way than the earlier approaches exemplified by [10 and 18]. We
consider only univariate X and Y to simplify the exposition; the multivariate
case is similar [8, Section 5].

Let x be a univariate, strictly indeterministic wide sense stationary process

with moving average representation x, = YS=oaE,-s, var (e,) = o-22 Let i index
replications of an experiment (later, to be interpreted as independent samplings
from a model or a population of economies) in which the values of ?, may be
fixed, or generated randomly according to some design. Suppose Ei,=
41i cos (At) + 2i sin (At), with VIi and 42i jointly zero-mean Gaussian. For
var (Ei,It)= a2, it is necessary and sufficient that var (,i)=var (,2i) =
CO (i,
C2,92i) = 0. Equivalently, we have Ei, pip cos (4i + At) where (using the
_
Box and Muller transform [1]) p2 = + 2 o-2X2(2) and (/i= tan-' (l2j/4li) iS
uniformly distributed on (-ir, ir]. Since
00 OC
xit = Ii I aj cos[A(t-j)]+L2 I aj sin [A(t-j)]
j=O j=O
= [4l1 cos (At) + 2 sin (At)] E aj cos (Aj)

j=O
+ [gIi sin (At) -2i COS (At)] I a, sin (Aj),

j=O
var (xi,) = o2{ [ a3 cos (Aj)] + [ aj sin (Aj)]j = S.(A).
The spectral density can thus be recovered from observations made at a single
point in time in an appropriately designed experiment.
This approach may be taken to recovering the measure of feedback fll,(A)
from replications of a structural model (1.1) with C* 0 in the bivariate case
(k = I = 1). Let
u it = vi cos (At) + 42 sin (At), vt = i1i cos (At) + 772i sin (At).
If conditional on t u(i) and v?l) are jointly Gaussian with zero means, var (u(if)
or, var (v(,`) = r*; cov (u(1) v(f)) = 0, then the random variables g1i, L2i, -qI, and
T2i must be zero-mean Gaussian, var (nji) o=*, var( ,ji) r*, cov (ii, ni) = 0,
and all other covariances zero. Letting
P*(L) Q*(L)
B*(L)-1_
R*(L) S*(L)
we have
OC) 0O
Yjf=ZL R*u(l) + I S.*v'1).
j=O~~~~O
= [;i cos (At) + 2 sin (At))] Z R3*cos (Aj)
j=o
+[4I sin (At)-42 COS (At)] i R* sin (Aj)

j=o

8 JOHN GEWEKE
+ [71licos (At) + q2i sin (At)] ESj* cos (Aj)

j=o
+[Ili sin (At)- 2i COS(At)] IS* cos (Aj)

j=O
00 00
- Z R* cos
j=O
(Aj)u P+ E R* sin (Aj)u(2
j=O
+ E S* cos (Aj)vM + Y
=
Sj*sin (Aj)v t,
j=O
where we have implicitly defined u(2) and v(2). Note that u, = (U(), u(2) and
v't = (vt ), vit ) are orthogonal transformations of (4Ii, ;2i) and (qii, q2i), respec-
tively, with cov (u(f) V(M,) = 0. In this setup, the attribution of var (yit) = SY(A)
to ui, and vi, is a conventional analysis of variance problem. Given a sample
(u,, yi,, i = 1, .. ., n) a test of the hypothesis that y,i is unrelated to ui, might
proceed from ordinary least squares estimates of the regression equation
yit = 'ui, + wi, and the formation of the likelihood ratio test statistic
Ln = ln (n = Yi,/n i= 12 ). Then plim n1lLn = In (var (yi,)/var (wi,)) = ln (SY(Ak)/
IS(A)I%=*)f=fX,(A).The measure of feedback at the frequency A thus arises
naturally in the analysis of variance from the indicated experiment.
4. INFERENCE
Inference about measures of feedback is complicated by the usual parameteriz-

ation problems for time series. There is no obvious parametric form for the lag
operators in our autoregressions. Within any given parametric form-e.g., a lag
polynomial of finite order in either the moving average or the autoregression-the
number of parameters actually estimated is a difficult choice [9]. A further
difficulty in the case of measures of feedback is that asymptotic theory beyond
that reported in [7, Section 4] seems to lead to intractable computations. Given
the nonlinearity of expressions like fx, y(A) in the parameters of (2.2) or (2.6)
and the length of time series records typically available, one might well hesitate
to rely on asymptotic theory in any event.
The parameterization chosen for the work reported here is a vector
autoregression of order p. The choice of an autoregression leads to efficient
computational procedures, and can be justified on the grounds that if the
coefficients are square summable then Z, may be approximated arbitrarily well
in mean square by an autoregression of suitably large, but finite order. While
various criteria for the choice of p have been proposed (see the review in [9])
none of these are designed for subsequent inference in the case in which the
order of the autoregression is not really finite. A lag length of three years is used
for most of the empirical work; the robustness of key findings with respect to
this choice is documented in [8].

In the estimation of the vector autoregression of order p presumed deterministic

components (e.g., nonzero means or deterministic trends) are removed by ordinary
least squares (OLS) regression. Given a sample of size T, the estimate 1j=
T-1 Zj+I x,x' of Fj = Ex,x, j is computed, for j =0, .. , p. The algorithm of
Whittle [22] is then used to solve the Yule-Walker equations, providing estimates
B(L) of B(L) and Y of Y. This computational procedure has four attractions.
First, the estimator is asymptotically equivalent to the OLS estimator in the sense
that the limit of the difference of the estimators scaled by T' 2 is zero. Second,
B(L) is an invertible lag oerator [22] whereas the OLS estimate of B(L) can well
be noninvertible even when B(L) is invertible. This is an attractive property,
since measures like fx, (A) are constructed by inverting B(L). Third, computa-
tion time is proportional to p2 n3 (compared with p3n3 for OLS) and storage is
proportional to pn2 (compared with p2n2). Finally, Whittle's algorithm provides
recursive estimates of vector autoregressions of order 1, 2,. . . , p and the corre-
sponding variance matrices of the residuals; more on this below. The single
disadvantage of the algorithm is that it provides no analogue of the moment
matrix from which the variance of OLS estimates is approximated, but that is
irrelevant for the approach to inference taken here.
Point estimates of the measures of feedack are formed by replacinf B(L) with
B(L) and Y with Y in the equations of Section 2. The estimates X, T, and C are
formed by partitioning Y; the estimated parameters of (2.2) are the obvious
transformation of B(L) using these estimates; the Fourier transform of the
estimated lag operators in (2.2) is inverted to provide estimates of R+(A) and
S+(A) in (2.6). The estimates of 1Yjl and ITyl are those implied by B(L) and Y,
rather than those which would be obtained from direct estimation of (2.3) and
(2.4). An algorithm for the efficient computation of I2JXIand ITyl is described in
[8, Appendix B].
There is no tractable, reliable asymptotic distribution theory available to
approximate the variances or distributions of estimators like Fx-y of Fxy and
.A
f,c y(A) of xy(A). In addition, there is obviously finite sample bias since, for
example, FV > ? 0 and fx ,y(A) ? 0 by construction: it is natural to suspect that
such upward biases become substantial as (in this example) kp becomes a
nonnegligible fraction of T. One might try to adduce evidence on this point as
follows. Suppose that -, in (2.1) is normally distributed and the autoregression
is in fact of order p. Generate R replications of sample size T directly from the
synthetic population
B( L) t.= ft, ft - N(10, Y)
for t = p + 1, . . ., T; for t : p, use the shorter autoregressions provided by Whittle's

algorithm.
Obtain the R-fold replication of estimates of the measures of interest from the
synthetic sample, e.g. Fx y i 1,...,R. Let F(J2_ R_-Y R=z FX y, and define
bR- FX /FxR >. It the percentage bias in Fx y is the same for all B(L) and
P, then F\- y -b: R )F_ +,=(b( R)2pX ) w converges to an unbiased estimator of

10 JOHN GEWEKE
Fx- almost surely in R. Let l=[aR/2],u= R-[aR/2], and Fxy denote a

typical order statistic. Mlaintainingthe assumption of constant percentage bias,
a 100(1 -Ca) per cent confidence interval is (b2F(x, -, b2FYx,y). All confidence
intervals reported subsequently were formed in this way.
The bias correction and confidence interval are much like those made in the
bootstrap as discussed in [4]. There are three differences. First, we assumed a
distributional form for E, and in this respect the nrocedure is like the parametric
bootstrap [4, Section 5.2]. This was done only for computational convenience.
The empirical distribution function of B(L)zg, or other parametric forms, could
have been used. Second, the procedure applied here implicitly takes the bias
function to be linear homogeneous in the parameter of interest, whereas the
bootstrap usually takes it to be constant. Neither assumption is likely to be true
globally, and both will be true locally if the true bias function is smooth. Both
procedures are asymptotically defensible in the latter case. The present procedure
is relatively attractive because Fx,y is arithmetically nonnegative. Finally, in
lieu of the random sampling assumption which is fundamental to the boot-
strap procedure we have assumed the Et are i.i.d. The procedure used here is
thus best motivated if {Zt} is known to be an autoregressive, linear process of
order p; robustness with respect to this assumption remains an outstanding
problem.
5. EMPIRICAL RESULTS WITH ANNUAL DATA
The first data set employed in the empirical investigations is taken from a
larger set compiled and documiented by Friedman and Schwartz [6] in their work
with U.S. and U.K. money, income, prices, and interest rates. Table I details the
construction of the four basic series employed here-the growth rate of money
balances, m; the growth rate of output, y, the growth rate of real balances, m -p;
and the real interest rate, r-from their data.
The link between any data set and the theoretical constructs of a macroeconomic
model is never strong; there are two preeminent difficulties with this data set.
The first is that the real interest rate series r is not properly aligned, either
internally or with the other series. The series i(t - 1) is the average of monthly
quotations on 4-6-month commercial paper issued in the year t - 1, and therefore
represents a yield to maturity over a holding period centered on July to October
or December of that year. The rate of price inflation log [P( t)/ P( t - 1)] is centered
on the period July of t - 1 to June of t, however. For the late nineteenth and
early twentieth centuries, the basic series required to construct annual holding
period yields appear not to exist. This problem is circumvented in our twentieth
century monthly data set introduced in the next section.
The second and greater difficulty is that m may be a poor proxy for the growth
rate of money balances employed in mracroeconomicmodels. The problem arises
at two levels. There is the problem of definition and measurement elicountered
with any stock, owing to the fact that market data cannot be employed as it is
with flows and prices. More fundamentally, money in macroeconomic models is

a distinctive commodity, whereas monetary data must be an aggregation of a

continuum of assets. This induces an unavoidable measurement error in any
monetary series, whose statistical properties are difficult to characterize. Measure-
ment error in one series which is uncorrelated with all other series in the vector
lowers measures of overall feedback, and if feedback at a particular frequency
is zero with the true series, then it will also be zero with the contaminated series.
Hence there is at least one condition under which dynamic neutrality of "true"
m with respect to y and/or r would be reflected also in the relationship between
measured m and y and/or r. The same cannot be said of any vector which
includes m and m-p. Furthermore, systematic departures of measured from
conceptual m with long periodicities seem inherently plausible. The measurement
problem therefore potentially masks structural neutrality of m with respect to
vectors including m - p.
Prior to estimation, tests for regime change for each group of variables con-
sidered were conducted as follows. Point estimates for a vector autoregression
with three lags were obtained as described in Section 4 for each of two chronologi-
cally adjacent periods, leading to estimated innovation variance matrices Y1 and
Y2 computed using T1and T2observations, respectively. The vector autoregression
was also estimated using the T = T1+ T2observations from both periods together,
producing the estimated innovation variance matrix Y. The test statistic T ln YI-
T1In i Yll - T2In i Y21for structural stability over the two regimes was computed
and is reported in Table II. When one regime, say the second, was too short the
statistic T In (IYl/l Y,f) was computed instead. Assuming a linear autoregressive
process of order three, the asymptotic distribution of the first statistic as T, and
T2 increase is X2(17); based on analogy with the fixed regressor model with
normal disturbances, the second statistic might be presumed approximately x2( )
with the degrees of freedom indicated in Table II. (Since the estimates are not
exact maximum likelihood, the test statistics are not identically nonnegative.)
The asymptotic marginal significance levels (in the "(a)" columns) reported are
based on the x2 approximation. Since the asymptotic theory is at best circumspect
in this application, the calculation of each test statistic was supplemented with
a small sampling study. Using the estimated parameters of the vector
autoregression for the entire period 200 replications of data were generated with
normally distributed innovations. The test statistic was then calculated, and the
fraction of replications in which it exceeded the value in the sample is reported
as "sampled marginal significance" in the "(b)" columns of Table II. The
difference in asymptotic and sampled marginal significance levels is not dramatic,
but quite systematic for the bivariate autoregressions: the asymptotic always
exceeds the sampled marginal significance level when the level exceeds .100,
whereas below .100, the relationship is generally reversed.
Based largely on the earlier work of Friedman and Schwartz [5], the eleven
regimes in Table I were selected, and it was presumed that there were no shifts
within these regimes. The World War II regime was excluded from consideration
a priori. Of the remaining 10 regimes, those adjacent in time were tested for
stability as just described, for each of the three bivariate vector autoregressions of

12 JOHN GEWEKE
TABLE I
ANNUAL DATA
Basic series (Column numbers of [5, Table 4.8] shown):

M2(t) Money stock M2 (1)
NNP(t) National income (2)
P(t) NNP price deflator (4)
i(t) Commercial paper rate (6)
Pop(t) Population (5)
Definitions:
RNNP( t) = NNP( t)/P( t)
RM2(t) = M2(t)/P(t)
m(t) = log [M2(t)/Pop(t)] -log [AM2(t- 1)/Pop(t -1)]
y( t) = log [ RNNPt t)/ Pop t)]-log [ RNNP( t-l )/ Pop( t-1 )]
m(t)-p(t) = log [RM2(t)/Pop(t)]-log [RM2(t-l)/Pop(t-1)]
r(t) = i(t -1) -log [ P(t)/ P(t -1)]
v ( t) = y (t) - Im (t) - p (t)]
Regimes:
1870-1878 Greenback 1934-1941 Bank reform
1879-1896 Gold Standard resumption 1942-1947 World War II
1897-1906 Gold inflation 1948-1953 Pre accords
1907-1913 Bank reform 1954-1965 Post accords
1914-1921 Early Fed to post WWI 1966-1970 Monetary/fiscal breakdown
1922-1929 Federal Reserve activism 1971-1978 Post controls
1929-1933 Great contraction
interest. There were three regime combinations for which stability was not rejected
at the 25 per cent level of significance for at least two of the three vectors: 1870-96,
1907-21, and 1954-70 (see the upper half of table II). Attempts to incorporate
regimes adjacent in time with these three periods showed strong evidence of
instability at the break points initially identified (lower half of Table II). For the
1870-96 and 1954-70 periods, stability tests can be conducted with three variables;
outcomes were favorable for the latter period, less so for the former.
A concise summary of the results obtained with annual data is given in Table
III. Here, as elsewhere in the tables, the X vector consists of the variable m and
the Y vector is indicated. This table provides point estimates, adjusted point
estimates, and confidence intervals for fx, y(A) at A = 0, the infinite periodicity,
and averaged over low frequencies ranging from A = 0 to A = ir/6, corresponding
to periodicities of at least 12 years. The adjusted point estimate Fx, y indicates
the average value of fx , y(A) across all frequencies, so comparison of reported
feedback at low frequencies with this estimate provides a rough contrast of long
with shorter run properties. The potential for a change in measures of feedback
at low frequepnciesunder alternative recursive normalizations of the vector is
indicated by Fx. y, as discussed in Section 2: when Fx. y = 0, the reported feedback
measures would be characteristic of any recursive normalization, but when Fx. y
is large, they could be quite different. The estimates reported here are robust
with respect to changes in lag length [8, Appendices C and D].
The results for m, y, and r (in the first, third, and fifth panels of Table III)
provide very strong support for the structural neutrality of money in a system of

TABLE II
TESTS FOR REGIME CHANGE
m and y m and m-p m and r

Test Marg. Sig. Test Marg. Sig. Test Marg. Sig.
Period Split DF Stat. (a) (b) Stat. Asy. Samp. Stat. (a) (b)
1870-96 78/79 17 12.76 .752 .495 10.15 .897 .725 35.45 .000 .000
1879-06 96/97 17 14.51 .631 .505 32.73 .012 .020 28.51 .039 .040
1897-13 06/07 14 11.01 .685 .450 29.14 .010 .045 22.34 .071 .070
1907-21 13/14 14 8.90 .837 .575 13.73 .470 .415 11.09 .678 .465
1914-29 21/22 17 43.20 .000 .005 36.24 .004 .010 33.27 .010 .030
1922-33 29/30 8 42.68 .000 .005 42.83 .000 .005 43.68 .000 .000
1930-41 33/34 8 -3.25 - .785 42.74 .000 .000 45.76 .000 .000
1948-65 53/54 12 25.94 .011 .065 31.29 .002 .010 28.21 .005 .030
1954-70 65/66 10 4.07 .944 .365 7.76 .652 .355 -3.10 - .760
1966-78 70/71 10 26.96 .003 .100 37.03 .000 .015 19.71 .032 .145
1870-06 78/79 17 14.76 .613 .330 12.78 .751 .585 28.91 .035 .005
1870-06 96/97 17 16.50 .488 .315 35.37 .006 .005 35.89 .005 .005
1879-13 96/97 17 11.53 .828 .560 34.40 .007 .025 30.59 .022 .020
1879-13 06/07 14 -3.54 - .805 2.81 .999 .515 -0.86 - .710
1897-21 06/07 17 18.77 .342 .265 48.05 .000 .000 41.81 .001 .005
1897-21 13/14 14 27.84 .047 .055 59.75 .000 .000 55.74 .000 .000
1907-29 13/14 14 -0.29 - .725 5.30 .981 .460 2.78 .999 .550
1907-29 21/22 17 38.41 .002 .000 29.94 .027 .045 26.43 .067 .065
1948-70 53/54 12 13.41 .340 .185 31.78 .001 .000 31.69 .002 .005
1948-70 65/66 10 -14.22 - .960 2.30 .994 .585 -8.55 - .900
1954-78 65/66 17 26.62 .064 .080 30.52 .023 .023 23.37 .138 .090
1954-78 70/71 17 47.24 .000 .000 53.91 .000 .000 39.00 .002 .010
Vectors of Order 3
Test Marg. Sig.
Vector Period Split DF Stat. (a) (b)
m, y, m-p 1870-96 78/79 27 35.51 .126 .200

m, y, r 1870-96 78/79 27 43.02 .026 .085
m, m-p, r 1870-96 78/79 27 39.14 .061 .085
m,y, m-p 1954-70 65/66 15 5.10 .991 .720

m,y, r 1954-70 65/66 15 12.55 .637 .625
m, m-p, r 1954-70 65/66 15 39.07 .001 .110
NOTES: (a) Based on limiting chi-square distibution with degrees of freedom shown.
(b) Based on sampling study as described in text.
the form (2.2). Adjusted point estimates of feedback from m, fx,y(A), range
from 0 to .06 at low frequencies. Testing at the 10 per cent level, one would never
reject the hypothesis that money accounts for less than one per cent of the variance
in y and/or r at the infinite periodicity and in only one of the nine cases for
periodicities of 12 or more years. Adjusted point estimatesAof feedback at low
frequencies are always less than those of overall feedback Fx, y in some cases
dramatically so. Even if one takes the opposing prior position that m is not
structurally neutral with respect to y and r in a model of the form (2.2) the results
provide little support: (0, .1) provides at least a 90 per cent confidence interval
for feedback from m to r or m to (y, r) at low frequencies; upper bounds for
feedback from m to y in this interval are somewhat higher. In identifying

14 JOHN GEWEKE
y, y, y, y,
80%
v v v y, y, y, m r r r y y y
bSampled r
m-p,
m-p, r r
m-p,mr-p,r
mr-p, r r m-pm-p
mr-p Vector
r r -p
y,rm-pm-p
confidence
marginal
intervals
Period
are 1907-21
1954-70
1870-96
1954-70 1907-21
1870-96
1954-70 1907-21
1954-70
1870-96 1907-21
1870-96 1907-21
1870-96
1954-70 1954-70 1907-21
1954-70
1870-96 1907-21
1870-96 1870-96
1954-70
significance
level,
shown.
X 3 3 3 2 3 2 2 3 2 2 3 2 2 3 3 3 3 4 3 3 3 3 3
Lags
"(b)"
vector
is
column
of
always .740_ -
.545
.370 .110 - .085
- .085.625 - .200
.720 .465
.760 .000.355
.415
.725.365
.575
.495 Chowb
Table
11.m(t).
Fx
.003
.000 2.5881.701
.2721.661 1.141
2.618.086
4.779 .731
.1551.968 .721 .076
.753
.1022.274 .825.299
.002 .077 Y
1.064
SUMMARY
.949
.389 .545.041
.147.085 .028 .281.094
.322
.329.054 .153 .023
.088 .281
.242.002
.742 .199.132 .156 FX.
.066
OF
_
f
5.708
.825
.3752.330
.542.455
.170 .067
.302.084 .0281.540 .025
.067 .015
.049 .103
.002.043 .047.019 .047 ,-
.084 TABLE
5(0) RESULTS,
A
III
-=0,
12.607
1.015
.4093.895
.454310.096
.244.036 .0062.585
.024 .023 .003
.017 .009
.000.020 .033.012
.079 .059
.040 ANNUAL
Infinite
f,.Y(0) DATAa
periodicity
(.144,
(.062, (.005, (.000, (.001, (.001,
(.727,9.819)
1.274) (.042,.765)
(.016,.400)
(.145,1.321) .080)
(.001,.021)
(.004,.109) .018)
(.002,.070)(.000,.059)
(.003,.081)(.000,.000)
(.000,.129)
(.003,.524)
.159)(.000,.084)
(.003,.360)
.219)
3.120)
(3.007,28.307) (.042,1.152) (.571,9.210)
2.064 .372.881
.827 .577.478 .329.091
.155 .081.710
.079 .076 .021
.054 .053.031
.024 .155
.057.038 .071
.070 0<
fx-,(A)A
<ir/I6,
12+
3.064 .401.941
1.015 .490.147 .031
.275.043
.085 .033.861 .029 .004
.020 .027.010
.008 .138
.039.029
.045
.064
fx years,
y(A) Low
(.073,
(.253, (.011,
(.007, (.001,(.007 (.007, (.009,
frequencies
(.069,4.846)
(.176,2.655)
1.103)
1.883) (.026,.405)
(.019,.269)
(.077,.640)
(.217,1.051) (.009,.125)
.090)(.238,2.013)
.093) (.006,.091)
(.003,.072)
.020) 102)(.001,.044)
(.001,.046) .152)(.005,.118)
(.025,.616)(.006,.192)
.273)

fx-y (O) =0 with structural superneutrality of money we interpret the contem-

poraneous partial correlation between m and real variables as a passive response
in m (Theorem 1). This assumption has been widely debated and is far from
settled [20, 19]. For the periods 1870-96 and 1954-70, however, conclusions
about structural superneutrality are fairlayrobust with respect to assumptions of
alternative recursive orderings because Fx. y is low when Y consists of y and/or
r; recall Theorems 2 and 3.
Bivariate results for money and real balances (second panel of Table III) are
not as decisive. The adjusted point estimate for low frequencies in 1907-21 is
.138, and the interpretation of the findings for the other two periods is clouded
by substantial instantaneous feedback. When real balances are added to y and/or
r (fourth, sixth, and seventh panels of Table III), the evidence refutes structural
neutrality at least as often as it supports it. For no period does m appear
structurally neutral with respect to mr-p and r jointly, and for 1954-70 it does
not appear structurally neutral with respect to y and m -p. These findings are
mitigated by two factors. The first is that feedback between m and vectors
containing m - p could have been induced by measurement error in m. Still, it
seems unlikely that this could account entirely for the fact that the evidence
against structural neutrality is usually stronger for m -p in combination with
other variables than for m - p alone. The second factor is that evidence against
structural neutrality aiways occurs in conjunction with substantial estimates of
instantaneous feedback. The conditions of Theorem 3 indicate that neither the
adjusted or unadjusted point estimates are inconsistent with the existence of
recursive models in which money is structurally superneutral.
A conceptually simpler explanation of the findings involving m - p is provided
in the last panel of Table III which presents estimates of feedback between the
rate of monetary growth, m, and the growth rate of velocity v = (m -p) -y. In
every case, feedback from m to v is greater than feedback from m to any pair
of variables, and for 1954-70, it is greater than feedback from m to the entire
vector of real variables, at low frequencies. The evidence of 1954-70 is especially
strong because m accounts for over 99 per cent of the variance in velocity at the
lowest frequenCyand instantaneous feedback is zero. Our empirical findings may
therefore be summarized as strongly supporting structural neutrality of m with
respect to (j, r) in a model of the form (2.2), while decisively rejecting structural
neutrality of m with respect to v in any fully recursive structural model for all
three periods.
More detailed results for in, y, and r are provided in Tables IV through VI.
In these tables "variance reduction" refers to reduction in one-step-ahead forecast
error, as described in Section 2: e.g., for 1870-96 the estimate .122 of Fy,x
corresponds to an 11.5 per cent reduction in the orne-step-ahead mean square
forecast error for m when there lagged values of y and r are added to three lagged
values of m as conditioning variables. In the decomposition of feedback by
frequency "proportion of variance explained"'indicates the fraction of the spectral
density attributed to the other variables' innovations at the frequency in the
decomposition (2.7): e.g., at frequencies corresponding to periodicities of 3 to

16 JOHN GEWEKE
TABLE IV
FEEDBACK BETWEEN m, y, AND r, 1870-1896"
X=m; Y=(y,r)
Feedback measure Variance reduction

Fxy =.508 (.363,.682) 39.9%
Fx.y =.155 (.038, .350) 14.4%
~X_y = .281 (.142, 498) 24.5%
Fy_x =.122 (.059,.222) 11.5%
Decomposition by Frequency Groups, fx s (A)

Frequency Average Proportion of
Group Periodicity Feedback measure Variance Explained
0 0c .006 (.001, .021) 0.6%
(0, .167ir] c12 years .033 (.011, .090) 3.2%
(.167r, .3087r] 6.5-12 years .405 (.188, .842) 33.3%
(.308ir, .667ir] 3-6.5 years .467 (.233, .788) 37.3%
(.667ir, iT] 2-3 years .224 (.067, .469) 20.1%
Decomposition by Frequency Groups, fyx(A)

Group Periodicity Feedback Measure Variance Explained
0 cx .067 (.014, .196) 6.5%
(0,.167ir] 12 years .071 (.018, .179) 6.9%
(.167ir, .308Tr] 6.5-12 years .142 (.045, 302) 13.2%
(.308m, .667IT] 3-6.5 years .191 (.076, .357) 17.4%
(.667r, I] 2-3 years .062 (.021, .140) 6.0%
Estimated autoregressions incorporated three lags and intercept. 80% confidence intervals are shown.
6.5 years m innovations account for about 37.3 per cent of the generalized variance
in r, for the period 1870-96. Because the estimates reported here have been
corrected for bias as described in Section 4, the identities (2.5) and (2.8) are not
reflected precisely but agreement is close. Notice the confidence intervals are
asymmetric, with more of the interval above than below the point estimate: this
is plausible given the resemblance of our estimators to maximum likelihood
estimators, but would not be characteristic of intervals based on a limiting normal
distribution.
Presumed structural neutrality of m with respect to y and r, in conjunction
with the approach taken in Section 3, permits an empirical characterization of
the long run. Tables IV, V, and VI indicate clearly that the statistical structure
was not the same in the three time periods; in particular, feedback from (y, r)
to m appears to increase sharply proceeding through the successive periods. In
1870-96, feedback from m to (y, r) occurs in the intermediate run and shorter
periodicities, in 1907-21 at the business cycle and shorter periodicities, and in
1954-70, it appears to be absent altogether. This suggests that, in the framework
of Section 3, we may take the empirical counterpart of the long run to be
periodicities of about 12 years and longer.

TABLE V
FFEDBACK BETWEEN "I, y, ANM) r, 1907-1921'
X ---m; Y (y, r)
Feedback meaasure Variance reduction
Fx> -- 1.742 (1.284,2.202) 83.5%

Fx y= 1.141 (.697, 1.721) 68.0%
Fx- y= .322 (.097,678) 27.5%
Fy-x =.378 (.138,.733) 31.5%.,
Decomposition by Frequency Groups, fX -(A)

0 cc .024 (.005, .080) 2.4%
(0, .167 ir) ? 12 years .031 (.007, .093) 3.1%
(.167ix,.308ir] 6.5-12 years .095 (.035, .224) 9.1%
(.3087T,.6677r] 3-6.5 years .374 ( .144, .740) 31.2%
(.6677r, ir] 2.3 years .512 (.137, 1.066) 40.1%
Decomposition by Frequency Groups, f-,x(A)

0 oo .307 (.053,.972) 26.4%
(0, .1677r] 12 years .302 (.056, .884) 26.0%O
(.167ir,.308ir] 6.5-12 years .325 (.073, .815) 27.8 '%
(.308r, .6677r] 3-6.5 years .270 (.101, .517) 23.6%
(.667ir, 7r] 2-3 years .521 (.173, 1.036) 40.6?,h
6. EMPIRICAL RESULTS WITH MONTHLY DATA
Essentially the same analysis as the one just reported was undertaken for the
postwar period with a monthly data set which is described in Table VII. All of
the variables in this data set differ from the previous one: MI is used instead of
M2, industrial production in place of net national product, and the consumer
price index in lieu of the implicit net national product deflator. Most important,
one-month holding period returns on U.S. Treasury Bills are used in place of
the four-to-six month prime commercial paper rate, thus obviating one of the
chief conceptual difficulties with the annual data set. There is still a minor
alignment problem since nominal holding period returns are calculated at the
end of the month while the consumer price index (like most price indices) is
recorded about midmonth. Results are insensitive to the obvious alternative
calculation of the real holding period return and to the substitution of wholesale
prices for consumer prices in the definition of r [8, Table E.10].
A concise summary of the results with the monthly data is provided in Table
VIII. The findings are broadly consistent with the results of the previous section
for the postwar period, and the results involving the rate of return are remarkably

18 JOHN GEWEKE
TABLE VI
FEEDBACK BETWEEN m, Y, AND r, 1954-1970a
X=m; Y=(y,r)
Feedback measure Variance reduction
F-y =.721 (.482, 1.045) 51.4%

Fx. y =.086 (.016,.218) 8.2%
F y= .054 (.017, .129) 5.2%
Fy,x= .785 (.368, 1.365) 54.4%
Decomposition by Frequency Groups, fx, Y(A)

Group Periodicity Feedback Measures Vanance Explained
0 x .036 (.004, .109) 3.6%
(0, .167r3 al12years .043 (.009, .125) 4.2%
(.167ir,.308Xr] 6.5-12 years .070 (.024,.165) 6.7%
(.3081r,.6677r] 3-6.5 years .071 (.022,.167) 6.9%
(.6671r,7r] 2-3 years .059 (.012, .170) 5.7%
Decomposition by Frequency Groups, fyx(A)

0 so 1.912 (.385, 5.474) 85.3%
(0,.1677r] 212 years 1.342 (.307, 2.883) 73.9%
(.167ir, .308ir] 6.5-12 years .420 (.143, .880) 34.3%
(.3087r,.6677] 3-6.5 years .375 (.187, .627) 31.3%
(.667r, 7r] 2-3 years .728 (.285, 1.293) 51.7%
TABLE VII
MONTHLYDATA
Basic series:
MI(t) Money stock Ml (Survey of Current Business, various issues)
IP(t) Industrial production (Survey of Current Business, various issues)
CPI(t) Consumer price index [12, Exhibit B-23]
R(t) Monthly total nominal returns on U.S. Treasury Bills [12, Exhibit B-8]
Definitions:
mf t) 3=log [MI(t)I Ml(t -1)J
y(t) = log [P(t)/IP(t - 1)]
m(t) -p(t) = log {[M1(t)/CPI(t)]/[Ml(t - 1)/CPI(t- 1)]}
r(t) = R(t)-log [CPI(t)/CPI(t- 1)]
v( t) = Yttt- m(t-P(t0l

TABLE VIII
SUMMARY OF RESULTS, MONTHLY DATAa
A =0, Infinite periodicity 0< A < .1677r, 12+ years

Y
Vector Chowh F _ v fx (0) fX_Y(0) fj_ y(A) fx_y(A)
y .850 .001 .188 .007 .000 (.000,.001) .412 .388 (.099,.886)

mr-p .440 2.565 .187 .131 .114 (.004, .996) .126 .070 (.009, .308)
r .350 .001 .105 .012 .001 (.000, .006) .056 .021 (.004, .109)
y, m-p .150 2.265 .518 4.081 6.750 (1.902, 16.159) 2.520 3.238 (1.096, 5.924)
y, r .150 .000 .229 .039 .004 (.000, .019) .265 .135 (.021, .336)
m-p, r .470 .347 .453 .005 .000 (.000,.001) .620 .574 (.207,1.399)
v .800 .130 .285 .303 .468 (.009, 2.384) .563 .618 (1.134, 1.300)
X vector is always m(t). 80% confidence intervals are shown.

hSampled marginal significance level based on 20 replications with sample split at 1965: 12/1966:1.
similar. There are a few noticeable contrasts. At the infinite periodicity, the only
substantial differences for the annual and monthly data appear with m and
(m -p, r), where there is no evidence of feedback for the monthly data. Super-
neutrality of money with respect to output and the real rate of return is again
supported with the monthly data, while the superneutrality of money with respect
to velocity is rejected. The operational definition of the long run which emerges
from the empirical results is not always the same with the monthly data set as
with the annual one, however. Most noticeably, there is substantial feedback
from m to y at some low frequencies, and this is reflected in feedback from m
to y and r jointly. The difference is attributable to temporal disaggregation rather
than from the different construction of the series [8, Tables E.8, E.9, F.8-F.15]:
for the annual aggregates, the adjusted point estimate of feedback over the secular
long run is .034 for m and y, and .049 for m and (y, r). Lag length is not a factor:
point estimates presented in [8, Appendix E] show that the summary results of
Table VIII would remain substantially unchanged were lag length changed to 24
or 48 months.
The findings with monthly data suggest that our broad interpretation of the
empirical evidence on superneutrality is not affected by variable construction.
The empirical counterpart of the notional long run in the framework of Section
3 may, however, be sensitive to temporal aggregation; further analytical or
empirical work on this point is desirable.
Duke University
Manuscript received September, 1983; final revision received February, 1985.
APPENDIX
PROOF OF THEOREM 1: Immediate from H'(1) = 0< R'(1) = 0, and R (0) = R (1).
PROOF OF THEOREM 2: Consider the standard representation (2.1) and the structural model (1.1)
with the variables reordered so that no permutations are required for the recursive ordering, and
denote the variance matrices of the disturbances by Y and Y* respectively in the reordered equations.

20 JOHN GEWEKE
Then IYj = IYI and IY*j = IYI*. Furthermore Y* = PYP', where P is a lower triangular matrix with
diagonal elements unity. Since IPI= 1, IY* = YI. Clearly, Y*1= 1*1* T*, so Fxy=
ln (I T!'|/| TI) =In (I X I/I1 *I) + In (ITYI/I T*I) = F*-x + F*y . The structural equations
KI- in
X, E*(L)x, + F*(L)y, = u*, are the projection of x, on all lagged values of x, and y, and from 0 to
I of the elements of-y,; hence 1I+1 1I*1 I1.1. Thus
Fx - y = In I1X/ 1 n (|IYx11/ *|) --- In |X/+)

= In (| *|/|E|) + In (|1E1 E1) = Fy_x + Fx.y,
the last equality from [7, Theorem 1(b)].
PROOF OF THEOREM 3: Since f*.,(A)==O, R*(A)=O; and since the structural model is
fully recursive, C* =0. Hence [8, eq. A.6], S+(A) = S*(A) T*S*(O)'(T+)-Y. Then
f (A) =J(A) )-f*y (A) = In [IS?(Ak) T?S+(Ak)'I/IS*(Ak) T*S*(Ak)|I]
= In (I T*I/ IT+I)+In (IS*(0)12).
Since the structural model is fully recursive, there is a permutation of the rows and columns of A*(0)
that is lower triangular, and all principal minors of this permutation are unity. Hence, In (IS*(0)12) = 0;
and In (IT*I/I T+|) ln (ITl/l T?l) = Fx- y.
REFERENCES
[1] Box, G. E. P., AN) M. E. MULLER:"A Note on the Generation of Random Normal Deviates,"
Annals of Mathematical Statistics, 29(1958), 610-611.
[2] DOOB, J. L.: Stochastic Processes. New York: Wiley, 1953.
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The Superneutrality of Money in the United States: An Interpretation of the Evidence

Author(s): John Geweke

This content downloaded from 41.78.76.202 on Fri, 21 Jun 2013 03:45:00 AM

THE SUPERNEUTRALITY OF MONEY IN THE UNITED STATES:

IN STATIC MODELS neutrality is defined as the condition that alternative values

This content downloaded from 41.78.76.202 on Fri, 21 Jun 2013 03:45:00 AM

This content downloaded from 41.78.76.202 on Fri, 21 Jun 2013 03:45:00 AM

2. MEASLJRES OF FEEDBACK AND STRUCTURAL NEUTRALITY

With further identifying restrictions (1.1) determines the autoregressive rep-

(2.2) B+(L)z,= ++(L) F+(L) |t = | +

E+(O) = I, G+(O)= I, H+(O) = 0. This representation provides the linear projec-

This content downloaded from 41.78.76.202 on Fri, 21 Jun 2013 03:45:00 AM

partial multiple correlation coefficient between y, and x, conditional on the entire

(2.8) Fx, y =- f,Y(A ) dA.

THEOREM 1: If (2.2) is structural, then X is structurallyneutral with respect to

(Proofs are in an Appendix.)

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DEFINITION: Suppose there exists a permutation of the rows and columns of

In a fully recursive model all contemporaneous relations between X and Y

In a fully recursive structural model, dependence between X and Y(Fx,y) is

This content downloaded from 41.78.76.202 on Fri, 21 Jun 2013 03:45:00 AM

In summary, structural and stochastic neutrality have no refutable implications

3. FEEDBACK AND THE LONG AND SHORT RUN

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Let x be a univariate, strictly indeterministic wide sense stationary process

= [4l1 cos (At) + 2 sin (At)] E aj cos (Aj)

+ [gIi sin (At) -2i COS (At)] I a, sin (Aj),

var (xi,) = o2{ [ a3 cos (Aj)] + [ aj sin (Aj)]j = S.(A).

+[4I sin (At)-42 COS (At)] i R* sin (Aj)

This content downloaded from 41.78.76.202 on Fri, 21 Jun 2013 03:45:00 AM

+ [71licos (At) + q2i sin (At)] ESj* cos (Aj)

+[Ili sin (At)- 2i COS(At)] IS* cos (Aj)

Inference about measures of feedback is complicated by the usual parameteriz-

This content downloaded from 41.78.76.202 on Fri, 21 Jun 2013 03:45:00 AM

In the estimation of the vector autoregression of order p presumed deterministic

B( L) t.= ft, ft - N(10, Y)

for t = p + 1, . . ., T; for t : p, use the shorter autoregressions provided by Whittle's

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Fx- almost surely in R. Let l=[aR/2],u= R-[aR/2], and Fxy denote a

5. EMPIRICAL RESULTS WITH ANNUAL DATA

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a distinctive commodity, whereas monetary data must be an aggregation of a

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Basic series (Column numbers of [5, Table 4.8] shown):

This content downloaded from 41.78.76.202 on Fri, 21 Jun 2013 03:45:00 AM

m and y m and m-p m and r

m, y, m-p 1870-96 78/79 27 35.51 .126 .200

m,y, m-p 1954-70 65/66 15 5.10 .991 .720

This content downloaded from 41.78.76.202 on Fri, 21 Jun 2013 03:45:00 AM

This content downloaded from 41.78.76.202 on Fri, 21 Jun 2013 03:45:00 AM

fx-y (O) =0 with structural superneutrality of money we interpret the contem-

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Feedback measure Variance reduction

Decomposition by Frequency Groups, fx s (A)

Decomposition by Frequency Groups, fyx(A)

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Feedback meaasure Variance reduction

Fx> -- 1.742 (1.284,2.202) 83.5%

Decomposition by Frequency Groups, fX -(A)