Guatemala Paper of the Day (Macroeconomics)

From a 2005 paper by Frederick H. Wallace: "Long Run Money Neutrality: The Case of Guatemala," published in the Latin American Journal of Economic Development.  

Abstract

The Fisher and Seater (1993) methodology is used to test for the long run neutrality of money in Guatemala, 1950-2001. Real GDP, real per capita GDP, and the money measures, M1 and M2, are integrated of order one [I(1)]. Given these orders of integration, the Fisher-Seater neutrality test can be applied. The evidence suggests that M1 and M2 are neutral with respect to real GDP. Furthermore, the test indicates that M1, but not M2, is neutral with respect to real per capita GDP as well.

Resumen

La metodología de Fisher y Seater (1993) es utilizada para analizar la neutralidad del dinero en el largo plazo en Guatemala, 1950-2001. El PIB Real, PIB Real per capita, y las medidas del dinero. M1 y M2, son variables integradas de orden uno [I(1)]. Dados estos ordenes de integración, el test de neutralidad de Fisher y Seater puede ser aplicado. La evidencia sugiere que tanto M1 como M2 son neutrales respecto al PIB Real. De otra manera, el test tambien indica que solamente M1 es neutral con respecto al PIB Real per capita.

The author concludes:

Application of the Fisher-Seater test of long run money neutrality to data for Guatemala indicates that the LRN proposition cannot be rejected for either real GDP or real per capita GDP when M1 is the money measure. It is puzzling that long run neutrality cannot be rejected for total GDP but cannot be accepted for per capita GDP when M2 is used. There is no obvious reason for such a difference. However, the bulk of the evidence suggests that LRN does hold.

The failure to reject the LRN proposition is particularly interesting in the case of Guatemala because the country was subjected to significant political turmoil during the sample period. Previous work by Boschen and Otrok, Haug and Lucas, and Shelley and Wallace suggest that periods of aberrant economic performance can lead to a rejection of LRN. However, at least in the case of Guatemala, it does not appear that political instability affects LRN. Not even a long running civil war and military coups are sufficient to generate a violation of the classical LRN proposition.

Source.