IDEAS home Printed from https://ideas.repec.org/a/spr/empeco/v54y2018i4d10.1007_s00181-017-1270-1.html
   My bibliography  Save this article

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

Author

Listed:
  • Sajjadur Rahman

    (Texas A&M University-San Antonio)

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.

Suggested Citation

  • Sajjadur Rahman, 2018. "The Lucas hypothesis on monetary shocks: evidence from a GARCH-in-mean model," Empirical Economics, Springer, vol. 54(4), pages 1411-1450, June.
    • Handle: RePEc:spr:empeco:v:54:y:2018:i:4:d:10.1007_s00181-017-1270-1
    DOI: 10.1007/s00181-017-1270-1
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s00181-017-1270-1
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s00181-017-1270-1?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(1), pages 122-150, February.
    2. Miller, Stephen M, 1991. "Monetary Dynamics: An Application of Cointegration and Error-Correction Modeling," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(2), pages 139-154, May.
    3. Kevin B. Grier & Ólan T. Henry & Nilss Olekalns & Kalvinder Shields, 2004. "The asymmetric effects of uncertainty on inflation and output growth," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(5), pages 551-565.
    4. Barro, Robert J, 1977. "Unanticipated Money Growth and Unemployment in the United States," American Economic Review, American Economic Association, vol. 67(2), pages 101-115, March.
    5. William A. Barnett, 2000. "Economic Monetary Aggregates: An Application of Index Number and Aggregation Theory," Contributions to Economic Analysis, in: The Theory of Monetary Aggregation, pages 11-48, Emerald Group Publishing Limited.
    6. William A. Barnett & Marcelle Chauvet, 2011. "International Financial Aggregation and Index Number Theory: A Chronological Half-Century Empirical Overview," World Scientific Book Chapters, in: Financial Aggregation And Index Number Theory, chapter 1, pages 1-51, World Scientific Publishing Co. Pte. Ltd..
    7. Kim, Chang-Jin & Nelson, Charles R, 1989. "The Time-Varying-Parameter Model for Modeling Changing Conditional Variance: The Case of the Lucas Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 7(4), pages 433-440, October.
    8. Pindyck, Robert S, 1991. "Irreversibility, Uncertainty, and Investment," Journal of Economic Literature, American Economic Association, vol. 29(3), pages 1110-1148, September.
    9. Lutz Kilian & Clara Vega, 2011. "Do Energy Prices Respond to U.S. Macroeconomic News? A Test of the Hypothesis of Predetermined Energy Prices," The Review of Economics and Statistics, MIT Press, vol. 93(2), pages 660-671, May.
    10. Ben S. Bernanke, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(1), pages 85-106.
    11. Evans, Paul, 1984. "The Effects on Output of Money Growth and Interest Rate Volatility in the United States," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 204-222, April.
    12. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    13. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    14. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-334, June.
    15. David A. Dickey & Dennis W. Jansen & Daniel L. Thornton, 1994. "A Primer on Cointegration with an Application to Money and Income," Palgrave Macmillan Books, in: B. Bhaskara Rao (ed.), Cointegration, chapter 2, pages 9-45, Palgrave Macmillan.
    16. Grier, Kevin B. & Tullock, Gordon, 1989. "An empirical analysis of cross-national economic growth, 1951-1980," Journal of Monetary Economics, Elsevier, vol. 24(2), pages 259-276, September.
    17. Froyen, Richard T & Waud, Roger N, 1980. "Further International Evidence of Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 70(3), pages 409-421, June.
    18. Barro, Robert J, 1978. "Unanticipated Money, Output, and the Price Level in the United States," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 549-580, August.
    19. Jarque, Carlos M. & Bera, Anil K., 1980. "Efficient tests for normality, homoscedasticity and serial independence of regression residuals," Economics Letters, Elsevier, vol. 6(3), pages 255-259.
    20. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, vol. 82(3), pages 472-492, June.
    21. Alberro, Jose, 1981. "The Lucas hypothesis on the Phillips Curve : Further international evidence," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 239-250.
    22. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-247, February.
    23. Kevin B. Grier & Mark J. Perry, 2000. "The effects of real and nominal uncertainty on inflation and output growth: some garch-m evidence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(1), pages 45-58.
    24. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    25. Ramey, Garey & Ramey, Valerie A, 1995. "Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review, American Economic Association, vol. 85(5), pages 1138-1151, December.
    26. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    27. Michael Athans, 1974. "The Importance of Kalman Filtering Methods for Economic Systems," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 3, number 1, pages 49-64, National Bureau of Economic Research, Inc.
    28. Kroner, Kenneth F. & Lastrapes, William D., 1993. "The impact of exchange rate volatility on international trade: Reduced form estimates using the GARCH-in-mean model," Journal of International Money and Finance, Elsevier, vol. 12(3), pages 298-318, June.
    29. Serletis, Apostolos & Shahmoradi, Akbar, 2006. "Velocity And The Variability Of Money Growth: Evidence From A Varma, Garch-M Model," Macroeconomic Dynamics, Cambridge University Press, vol. 10(5), pages 652-666, November.
    30. Elder, John, 2004. "Another Perspective on the Effects of Inflation Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(5), pages 911-928, October.
    31. Attfield, Clifford L F & Duck, Nigel W, 1983. "The Influence of Unanticipated Money Growth on Real Output: Some Cross-Country Estimates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 15(4), pages 442-454, November.
    32. Kormendi, Roger C & Meguire, Philip G, 1984. "Cross-Regime Evidence of Macroeconomic Rationality," Journal of Political Economy, University of Chicago Press, vol. 92(5), pages 875-908, October.
    33. Mascaro, Angelo & Meltzer, Allan H., 1983. "Long- and short-term interest rates in a risky world," Journal of Monetary Economics, Elsevier, vol. 12(4), pages 485-518, November.
    34. McMillin, W Douglas, 1988. "Money Growth Volatility and the Macroeconomy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(3), pages 319-335, August.
    35. Michael T. Belongia, 1984. "Money growth variability and GNP," Review, Federal Reserve Bank of St. Louis, vol. 66(Apr), pages 23-31.
    36. John A. Tatom, 1984. "Interest rate variability: its link to the variability of monetary growth and economic performance," Review, Federal Reserve Bank of St. Louis, vol. 66(Nov), pages 31-47.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kushal Banik Chowdhury & Srikanta Kundu & Nityananda Sarkar, 2018. "Regime‐dependent effects of uncertainty on inflation and output growth: evidence from the United Kingdom and the United States," Scottish Journal of Political Economy, Scottish Economic Society, vol. 65(4), pages 390-413, September.
    2. Mehmet Balcilar & Zeynel Abidin Ozdemir, 2020. "A re-examination of growth and growth uncertainty relationship in a stochastic volatility in the mean model with time-varying parameters," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 47(3), pages 611-641, August.
    3. Shah, Said Zamin & Baharumshah, Ahmad Zubaidi & Hook, Law Siong & Habibullah, Muzafar Shah, 2017. "Nominal uncertainty, real uncertainty and macroeconomic performance in a time-varying asymmetric framework: Implications for monetary policy," Research in International Business and Finance, Elsevier, vol. 42(C), pages 75-93.
    4. Apergis, Nicholas & Miller, Stephen, 2004. "Macroeconomic rationality and Lucas' misperceptions model: further evidence from 41 countries," Journal of Economics and Business, Elsevier, vol. 56(3), pages 227-241.
    5. Don Bredin & John Elder & Stilianos Fountas, 2009. "Macroeconomic Uncertainty and Performance in Asian Countries," Review of Development Economics, Wiley Blackwell, vol. 13(2), pages 215-229, May.
    6. Rahman, Sajjadur, 2016. "Another perspective on gasoline price responses to crude oil price changes," Energy Economics, Elsevier, vol. 55(C), pages 10-18.
    7. Kuang‐Liang Chang & Chi‐Wei He, 2010. "Does The Magnitude Of The Effect Of Inflation Uncertainty On Output Growth Depend On The Level Of Inflation?," Manchester School, University of Manchester, vol. 78(2), pages 126-148, March.
    8. Liu Jinan & Serletis Apostolos, 2020. "Money growth variability and output: evidence with credit card-augmented Divisia monetary aggregates," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 24(5), pages 1-11, December.
    9. Christopher Thiem, 2018. "Oil price uncertainty and the business cycle: Accounting for the influences of global supply and demand within a VAR GARCH-in-mean framework," Applied Economics, Taylor & Francis Journals, vol. 50(34-35), pages 3735-3751, July.
    10. Don Bredin & Stilianos Fountas, 2005. "Macroeconomic Uncertainty And Macroeconomic Performance: Are They Related?," Manchester School, University of Manchester, vol. 73(s1), pages 58-76, September.
    11. Rahman, Sajjadur & Serletis, Apostolos, 2012. "Oil price uncertainty and the Canadian economy: Evidence from a VARMA, GARCH-in-Mean, asymmetric BEKK model," Energy Economics, Elsevier, vol. 34(2), pages 603-610.
    12. Kushal Banik Chowdhury & Kaustav Kanti Sarkar & Srikanta Kundu, 2021. "Nonlinear relationships between inflation, output growth and uncertainty in India: New evidence from a bivariate threshold model," Bulletin of Economic Research, Wiley Blackwell, vol. 73(3), pages 469-493, July.
    13. Said Zamin Shah & Said Zamin Shah & Ahmad Zubaidi Baharumshah & Muzafar Shah Habibullah & Law Siong Hook, 2017. "The Asymmetric Effects of Real and Nominal Uncertainty on Inflation and Output Growth: Empirical Evidence from Bangladesh," International Journal of Economics and Financial Issues, Econjournals, vol. 7(1), pages 377-386.
    14. Aye, Goodness C. & Dadam, Vincent & Gupta, Rangan & Mamba, Bonginkosi, 2014. "Oil price uncertainty and manufacturing production," Energy Economics, Elsevier, vol. 43(C), pages 41-47.
    15. Berument, M. Hakan & Dincer, N. Nergiz & Mustafaoglu, Zafer, 2012. "Effects of growth volatility on economic performance – Empirical evidence from Turkey," European Journal of Operational Research, Elsevier, vol. 217(2), pages 351-356.
    16. Menelaos Karanasos & Ning Zeng, 2013. "Conditional heteroskedasticity in macroeconomics data: UK inflation, output growth and their uncertainties," Chapters, in: Nigar Hashimzade & Michael A. Thornton (ed.), Handbook of Research Methods and Applications in Empirical Macroeconomics, chapter 12, pages 266-288, Edward Elgar Publishing.
    17. Njindan Iyke, Bernard, 2016. "Real Output and Oil Price Uncertainty: Evidence from an Oil Producing Country," MPRA Paper 71307, University Library of Munich, Germany, revised 01 Apr 2016.
    18. Poshakwale, Sunil S. & Aquino, Katty Pérez, 2008. "The dynamics of volatility transmission and information flow between ADRs and their underlying stocks," Global Finance Journal, Elsevier, vol. 19(2), pages 187-201.
    19. Balaji Bathmanaban & Raja Sethu Durai S & Ramachandran M, 2017. "The relationship between Output Uncertainty and Economic Growth-Evidence from India," Economics Bulletin, AccessEcon, vol. 37(4), pages 2680-2691.
    20. Haigh, Michael S. & Bryant, Henry L., 2000. "Price And Price Risk Dynamics In Barge And Ocean Freight Markets And The Effects On Commodity Trading," 2000 Conference, April 17-18 2000, Chicago, Illinois 18934, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.

    More about this item

    Keywords

    Volatility of money growth; GARCH-in-mean model;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:empeco:v:54:y:2018:i:4:d:10.1007_s00181-017-1270-1. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.