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Empirical Economics

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29-06-2017

The Lucas hypothesis on monetary shocks: evidence from a GARCH-in-mean model

Author: Sajjadur Rahman

Published in: Empirical Economics | Issue 4/2018

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Abstract

In this paper, we review the Lucas hypothesis that the impact on real output to unanticipated nominal shocks is inversely related across countries to the variability of such shocks. In doing so, we model money supply volatility explicitly to capture important volatility effects that previous work has ignored. Using postwar data from 39 countries, we find empirical evidence in favor of the hypothesis. Our results are robust to data mining, alternative data frequencies, alternative measures of nominal shocks and monetary policy instruments, and alternative measures of the level of economic activity.

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See, for example, Mascaro and Meltzer (1983), Evans (1984), Belongia (1984), Tatom (1984, 1985), McMillin (1988), Grier and Tullock (1989), Ramey and Ramey (1995), Grier and Perry (2000), among others.

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The test is available in RATS Econometrics Software.

We conducted the same tests in log levels of the variables and find that the null hypothesis of a unit root cannot be rejected at conventional significance levels for most of the countries.

For a given country, we also conducted an F-test of the null hypothesis that the coefficients in the money supply equation are all zero, and the hypothesis is rejected at a conventional level of significance.

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Title: The Lucas hypothesis on monetary shocks: evidence from a GARCH-in-mean model
Author: Sajjadur Rahman
Publication date: 29-06-2017
Publisher: Springer Berlin Heidelberg
Published in: Empirical Economics / Issue 4/2018
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-017-1270-1

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