On the neutrality of money in CEE (EU member) states: A panel cointegration analysis

Abstract

The concept of money neutrality is an important pillar of the mainstream economic literature. It implies that autonomous changes in the money supply have no influence on real macroeconomic variables in the long run. The goal of this paper is to test the validity of (long-run) money neutrality proposition in the CEE (EU member) states. The empirical research is based on panel cointegration analysis which utilises annual data on real output and broad (M2) as well as narrow (M1) monetary aggregates over the 1995-2013 period for 11 ex-socialist EU countries. The results suggest that the money neutrality proposition could be rejected in both cases when narrow or broad measure of money supply is applied, meaning that an active monetary policy could and should be used as a stabilisation instrument as well as in stimulating real economic activity.