Tests of a rational expectations-structural neutrality model with persistent effects of monetary disturbances

Abstract

This paper describes tests of a rational expectations-structural neutrality (RESN) model capable of accounting for the persistent effects of aggregate demand shocks. The model imposes the identifying restriction that only contemporaneous shocks to aggregate demand affect a vector stochastic process of highly cyclic real variables. Tests are performed using a well-known measure of unanticipated monetary change as the demand disturbance. The results suggest that RESN models, observationally inequivalent from Keynesian models, can be constructed in such a way as to account for observable relationships between monetary and real variables.