EMPIRICAL-EVIDENCE ON NOMINAL WAGE AND PRICE FLEXIBILITY

This paper tests a necessary condition for the neutrality of money in a framework that imposes only weak restrictions on the money supply pr ocess. It extends Bernanke's [1986] work by weakening the set of just- identifying restrictions and by providing a statistical test of the ov eridentifying restrictions. Instead of specifying a structural model t o identify primitive shocks, I deduce the impact effects of structural money shocks under the neutrality hypothesis and then test whether th e system maintains neutrality as it propagates these impact effects. T he tests reject neutrality for both the M1 and the monetary base.