International Finance Discussion Papers (IFDP)
July 1986
Comovements in Aggregate and Relative Prices: Some Evidence on Neutrality
B. Dianne Pauls
Abstract:
This paper develops an alternative test of the neutrality of anticipated monetary policy. A multi-good equilibrium model along the lines of Barro and Hercowitz is used to derive a neutrality proposition for anticipated movements in the aggregate price level and to demonstrate econometrically its equivalence to the exogeneity of relative prices with respect to the aggregate price level. Multivariate causality tests provide a basis for testing these restrictions. The empirical results provide mixed evidence for the equilibrium models, while the variation in the findings across industries suggests a role for supply-side disturbances in explaining comovements in aggregate and relative prices.
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