TESTING THE IMPLICATIONS OF LONG-RUN NEUTRALITY FOR MONETARY BUSINESS-CYCLE MODELS

This paper compares sample fluctuations of the US business cycle with those predicted by a class of equilibrium monetary business cycle mode ls. The predictions of the models are generated using the long-run neu trality restrictions implicit in the models. By imposing these restric tions on sample data, tests of the ability of the models to replicate the dynamics of the US business cycle are constructed. Although the pr edictions of the models for real side variables are rejected, there is evidence that the nominal side predictions of the models are not reje cted.