Testing the Money Neutrality Hypothesis: An Econometric Analysis for Turkey

Yiğitbaş Ş.

Biga İktisadi ve İdari Bilimler Fakültesi Dergisi , vol.3, no.1, pp.36-48, 2022 (Peer-Reviewed Journal)


The neutrality of money hypothesis is based on the idea that a change in the supply of money affects only nominal variables in the economy such as prices, with no effect on real GDP. This paper investigates the money neutrality hypothesis for the Turkey by using the data of 1998:Q1-2021:Q3. Conventional unit root tests, including PP, ADF, and KPSS, are applied to determine the order of integration of variables; however, since the structural break in variables is not considered in these methods, Zivot-Andrews method is also applied to take it into account. Neutrality of money testing is not efficient in the case of cointegration between model variables. Thus, the Gregory-Hansen test, which investigates cointegration considering the structural break, is applied. The Gregory-Hansen test for cointegration is rejected at 5 per cent significance level, indicating that long run relationship exists between money supply and real income, in Turkey. The evidence suggests that money supply (M2) are not neutral with respect to real GDP, showing that it is inconsistent with the classical and neoclassical economics