Long-run neutrality of money and inflation in Spanish economy, 1830-1998

Abstract

In this article, we test a classical model of ináation with rational expectations for the case of Spain during the period 1830ñ1998. The principal testable implication is that money growth and ináation are cointegrated ruling out speculative bubbles. First, to detect episodes of potential explosive behaviour in the Spanish ináation rate, we use the recursive unit root tests for explosiveness recently proposed by Phillips, Wu, and Yu (2011), and Phillips, Shi, and Yu (2015a,b). Second, we consider the possibility that a linear cointegrated regression model with multiple structural changes would provide a good empirical description of the classical model of ináation for Spain over this long period. Our methodology is based on the instability tests recently proposed in Kejriwal and Perron (2008, 2010) as well as the cointegration tests developed in Arai and Kurozumi (2007) and Kejriwal (2008).