where rt = Moody's Index of Aaa bond yield minus the average annual rate of change in the seasonally adjusted consumer price index over the prior 36 months, which is used as the measure of real interest rate, and Mt = monthly M1 growth.

According to the "neutrality of money doctrine,'' which states that real economic variables—such as output, employment, economic growth and the real rate of interest—are not influenced permanently by money growth and, therefore, are essentially unaffected by monetary policy. .. . Given this argument, the Federal


44Note that we have not presented the standard errors of the estimated coefficients for reasons discussed in footnote 43.

45"The Fed and the Real Rate of Interest,'' Review, Federal Reserve Bank of St. Louis, December 1982, pp. 8-18.

Gujarati: Basic I III. Topics in Econometrics I 17. Dynamic Econometric I I © The McGraw-Hill

Econometrics, Fourth Models: Autoregressive Companies, 2004 Edition and Distributed-Lag



EXAMPLE 17.9 (Continued)

Reserve has no permanent influence over the real rate of interest whatsoever.46

If this doctrine is valid, then one should expect the distributed lag coefficients a, as well as their sum to be statistically indifferent from zero. To find out whether this is the case, the authors estimated (17.12.1) for two different time periods, February 1951 to September 1979 and October 1979 to November 1982, the latter to take into account the change in the Fed's monetary policy, which since October 1979 has paid more attention to the rate of growth of the money supply than to the rate of interest, which was the policy in the earlier period. Their regression results are presented in Table 17.4. The results seem to support the "neutrality of money doctrine,'' since for the period February 1951 to September 1979 the current as well as lagged money growth had no statistically significant effect on the real interest rate measure. For the latter period, too, the neutrality doctrine seems to hold since J2 a is not statistically different from zero; only the coefficient a1 is significant, but it has the wrong sign. (Why?)

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