Testing for Long Run Neutrality of Money in Mexico

Abstract

The Fisher-Seater methodology is used to investigate long run money neutrality in Mexico from 1932-2001. Long run neutrality is rejected for the full sample period. However, evidence suggests that the rejection is the result of a severe, downward shift in the mean growth rate of real GDP occurring at 1982. Neutrality is not rejected if post-1981 real GDP is adjusted for the change in mean growth or if one uses data only through 1981. The downward shift in mean real GDP growth followed sharp upward movements in the money and inflation series. This finding of non- neutrality in Mexico arising from extreme conditions is similar to that of Boschen and Otrok (1994) for the US.