Financial Market Efficiency, the Decomposition of "Anticipated" versus "Unanticipated" Money Growth, and Further Tests of the Relation between Money and Real Output: Note

Abstract

Probably the most controversial empirical findings in macroeconomics in the last decade stem from Robert Barro's investigations into the relative effects of versus money growth on unemployment and output. These studies generally proceed by decomposing observed money growth into what is defined to be its and components and then test the restriction that only the unanticipated money measure has important effects for unemployment and output in black box reduced-form real side equations that include determinants of the natural rates of unemployment and output as additional explanatory variables. l The results of these tests for the annual postwar U.S. data generally cannot reject the hypothesis that only unanticipated money growth is important for the determination of aggregate activity.2 Anticipated money growth is found to be neutral for unemployment and output. These results are important because they give empirical support to the assertion that the apparent nonneutrality of observed money growth does not provide any firm basis for the efficacy of a systematic countercyclical monetary policy. It should be clear that a crucial problem in testing for the neutrality (nonneutrality) of anticipated (unanticipated) money growth lies in developing an appropriate decomposition of observed money growth into its and parts. Small [13], Mishkin [8], and Weintraub [14] among others have