AN INVESTIGATION ON THE NEUTRALITY OF MONEY IN BRAZIL

Abstract

This paper carries out an empirical investigation on the hypothesis of the long run neutrality of money for Brazil. Unlike previous studies, we did not assume that the velocity of money is constant and applied tests to check this hypothesis as well. We used annual data on the nominal money supply (M0 and M4), the price level and real GDP for Brazil. The sample period spans from 1946 to 2008 when we use data on M0 and from 1970 to 2008 when we use data on M4. We used cointegration and unit root tests (giving especial emphasis to the dynamic properties of the velocity of money), and exogeneity tests. Our results showed that (i) the velocity of money can be treated as a constant only in the presence of structural breaks, and (ii) the real GDP is exogenous. Thefore, this paper provides supporting evidence for the hypothesis of neutrality of money.