TESTING AGGREGATE NEUTRALITY WITH HETEROGENEOUS SECTORS

The existing empirical literature on the neutrality of aggregate deman d policy implicitly assumes that the parameters of industry level outp ut functions differ insignificantly across sectors. This paper tests t his aggregation restriction and examines its implications for tests of aggregate neutrality. The results indicate that sectoral effects are significant determinants of aggregate output and that their exclusion may reverse the conclusions of aggregate neutrality tests.