Long-Run Neutrality, High Inflation, and Bank Insolvencies in Argentina and Brazil

Abstract

Using long, low frequency data on money and output over 1884-1996 for Argentina and over 1912-1995 for Brazil, it is found that money is long-run neutral but not long-run superneutral with regard to real output. A rise in money growth is associated with a decline in output - the opposite of the Tobin effect. The introduction of dummy variables for 1930s or to capture recent periods of financial disruption associated with bank insolvencies does not restore long-run superneutrality for either country. However, results indicate that bank insolvency episodes have a distinct and negative influence on output.

Keywords: long-run neutrality, inflation crises, bank insolvencies

JEL Classification: E31; E51