A Century of Nominal History in Argentina: Monetary Instability and Non-Neutralities

A Century of nominal history in Argentina: monetary instability
and non-neutralities*
Emiliano Basco (UBA-BCRA )

Tamara Burdisso (UBA-BCRA)
Eduardo Corso (UBA-BCRA )
Laura DAmato (UBA-BCRA )
Federico Grillo (BCRA)
Sebastian Katz (UBA-UdeSA-BCRA )
Preliminary version
January 2015
Abstract
Using the Fisher and Seater (1993) methodology we investigate the neutrality (and
superneutrality) hypotheses in the Argentinean case for the period 1900-2012. Contrary
to the neutrality predictions, we find that monetary aggregates have more than
proportional effects on prices and (negative) permanent effects on real GDP over the
whole period. Using the Bai-Perron methodology, we perform tests of structural breaks
to investigate if this finding can be attributed to particular regime. We confirm that
more than proportional price responses and negative long run non-neutralities are
present in environments characterized by price instability. This negative non-neutrality
could reflect the presence of disruptive mechanisms identify in the literature in high
inflation environments.
JEL classification: C31, C41, C51, C22, C51.
Keywords: Money, prices, real GDP, neutrality, unit roots, structural breaks,
Argentina.
* The opinions expressed in this paper are those of the authors and do not necessarily represent
those of the BCRA.
We thank participants at Cien aos de economa y sociedad en la Argentina 1913 2013 session
of VII Congreso Internacional de Economa y Gestin, the Jornadas de Econometra 2014 of

the FCE at UBA, the 2014 AAEP Annual Meeting and seminars at UTDT and UdeSA for their
valuable comments to previous versions of this paper.
We are indebted to the Prebisch Library staff and Tornquist Library staff, and specially
Mariano Iglesias for their invaluable assistance in the search for economic history literature and
data.
1
I. Introduction
South Americans are always in trouble about their currency. Either it is too good for home use, or, as
frequently happens, it is too bad for foreign exchange. Generally they have too much of it, but their own
idea is that they never have enough the Argentines alter their currency almost as frequently as they
change their presidents No people in the world take a keener interest in currency experiments than the
Argentines. W. R. Lawson in The Bankers Magazine of 1899, quoted in Alec Ford (1962).
Typically considered a disputed and controversial subject, there are no many

consensual propositions in macroeconomics. The idea that in the long run nominal
variables behave in a neutral (or superneutral) way can probably be one of the few of
them. A member of a more general family of irrelevance hypothesis that includes,
besides others, Fishers parity, the neutrality of exchange rate regimes, PPP,
Modigliani-Miller theorem and its associated lemmas like the Ricardian equivalence-
neutrality of money is probably the best known of these propositions. Following this
notion, permanent changes in monetary aggregates in its levels or its rates of growth-
should translate in proportional variations of absolute prices or in the general
inflation rate- without affecting relative prices and the associated real quantities.
A broad body of evidence tends to confirm this theoretical assumption. In fact, one of
the more robust empirical regularities in the literature is the existence of a strong
positive correlation between money and prices in the long run and that this
relationship is close to proportional (Lucas, 1980; McCandless and Weber, 1995). Many
papers, however, suggest that this relationship could be contingent to the prevailing
macroeconomic regime and that in low inflation contexts proportionality can be
weakened (Sargent and Surico, 2011). Basco, DAmato and Garegnani (2009) and
Bozzoli and della Paolera (2014) verify this stylized fact for some periods in Argentina.
At the same time, in line with neutrality hypothesis, the evidence tends to show that in
most economies there is no long run correlation between monetary evolution and the
behavior of real GDP. However, this finding is not as robust as the previous one
(Walsh, 2003). McCandless et al. (1995) found that there is no correlation between
money growth and real GDP growth for a large set of countries but positive one for a
subsample of OECD over the period 1960-1990. This is not the only inconsistency with
the orthogonality assumption in the empirical evidence on nominal and real variables
interactions. More notable is that these theoretical predictions contrasts with abundant
empirical evidence that shows that countries experiencing macro instability and high
inflation in particular- tend to exhibit a notably worst real performance than countries
functioning in a more stable nominal environment (see, among others, Barro 1995,
1996).
Long run negative non-neutralities of this kind are not easy to accommodate for
standard monetary theory (Heymann and Leijonhufvud, 1995). As Tobin (1992) says,
theory puts the burden of the proof on anyone who contends that money and
monetary inflations or deflations can have serious consequences for economic activity
and general well being. Strictly following neutrality, the consequences of monetary
policies are supposed to be irrelevant in the long run because, in equilibrium, a
perfectly anticipated inflation has no real effects, except for the distortionary effects of
the inflation tax.
2
Of course, in the short-run inflationary surprises can have positive real effects on
output if agents commit expectational mistakes. These effects, however, are transitory
and disappear once the monetary authority abuses of inflationary surprises. Moreover,
this abuse in using monetary policy to stimulate the economy could also lead to a lack
of credibility in stabilization policies, generating a higher sacrifice ratio. If this is all,
pure economic theory does not seem to provide enough compelling reasons for the
generalized dislike that people feel against inflation (Barro and Fischer, 1976).
This is not, however, what the empirical evidence on inflationary regimes shows.
Through many and diverse channels, nominal instability has huge costs on the real
performance of economies and strong negative effects on welfare.
Money is an institution that has evolved, facilitating trade and allowing economies to
develop complex patterns in the division of labor. By severely impairing economic
calculation, the bad functioning of monetary institutions in high inflation makes very
difficult to coordinate economic activities. Nominal uncertainty leads agents to waste
resources and to dedicate unnecessary efforts to the process of exchange. At the same
time, in an uncertain context the possibility of experiencing huge capital losses and
arbitrary redistributions of wealth leads agents to modify their microeconomic
behavior. Strong flexibility preference in the sense of Hicks (1974) and the drastic
shortening of relevant time horizons are two basic adaptive features of these episodes
(Fanelli and Frenkel, 1995). Credit disintermediation and the negative reward of long
run maturity activities like investment and innovation seriously affect the possibility of
economic growth.
It is through these various effects of economic disorganization that monetary

instability could generate the negative long run non-neutralities that explain the
publics and economists- dislike for inflation. Proliferation of monetary disorder
episodes along its problematic macroeconomic history made the study of the
Argentinean case a source of inspiration a great laboratory- for the search of
explanations to these negative non neutralities. Through decades, many research
works were capable to identify some of the main mechanisms in operation in the
frequent disruptive episodes that characterized the Argentinean experience.
However, in spite of identifying many of these channels, so far a few of these studies
have analyzed in a systematic way the issue of neutrality of money in the case of
Argentina (for an exception and a related perspective, see Bae and Ratti, 2000). The
present paper tries to accomplish. Based on a database not wholly disposable until
now, which includes data since the beginning of the 20th century; we analyze some
interactions between nominal and real variables, testing for neutrality. Following
Fisher and Seater (1993), we study the statistical properties and the order of integration
of the underlying series and test the neutrality propositions for Argentina. We also
evaluate if the relationship between nominal and real variables that we find for the
complete period changes when we consider different nominal regimes.
The paper is organized as follows: In the next section we review the main contributions
of the theoretical and empirical literature on neutrality. In section III we describe the
data set and examine the main stylized facts in the nominal evolution of Argentina.
The methodology chosen to test neutrality is presented in the fourth section, jointly
with the results of the unit root tests implemented to determine the order of integration
of the time series. The fifth section presents the empirical results. Since our results for
3
the whole sample could be dependent on the presence of different nominal regimes,
we test for the presence of structural breaks in the time series and check if our results
regarding neutrality remain once we split the sample considering these breaks. Finally,
the last section concludes.
II. The related literature
The notion of neutrality of money goes back to early statements of the quantity theory
but the contemporary term was introduced into the English-speaking world by Hayek
(1931) -and attributed by him to Wicksell (1898).
According to this notion, in equilibrium, real allocations should be independent of the

monetary side of the economy. This statement doesnt mean that in the short term i.e.
the transition between two equilibriums real effects could not be verified as a result of
the disturbances occurred in the nominal side. In fact, since Patinkin (1956), the
modern hypothesis of the neutrality of money does not require appealing to the
validity of the so-called classical dichotomy for the irrelevance of nominal variables
in the long-run.
In standard modern macroeconomic models the influence of the nominal variables in

the economy is transmitted to the economy through different channels. However, these
influences are assumed to be temporary. Nominal shocks do not affect real allocations
in the long-run. This result does not hold if permanent effects of monetary
disturbances are incorporated. Mundell (1963) and Tobin (1965, 1969) questioned the
Fishers parity as an equilibrium relationship arguing that, under increases in the
expected rate of inflation, substitution trough physical capital could be verified, with
the consequent decline in real returns of alternative assets to money i.e. the nominal
interest rates increases less than expected inflation. Money would no longer be
superneutral and increases in the expected rate of inflation could have a permanent
effect on equilibrium capital stock.
But, as stressed by Orphanides and Solow (1990), this result is far from being
confirmed empirically and has not played any role in discussions on high-inflation
episodes in which the evidence seems to point strongly in the opposite direction. In
fact, Fischer (1974) and Stockman (1981) argue that the Tobin effect could change its
sign. This would happen if there is complementary between money and physical
capital rather than substitution. Thus, an increase in expected inflation simultaneously
decreases the demand for money and physical capital, adversely affecting the long-run
level of GDP. Both cases refer, however, to portfolio decisions in equilibrium. It is
difficult to assume, conversely, that inflationary processes reflect such equilibriums.
Non-neutralities have been emphasized by Heymann and Leijonhufvud (1995), when

characterizing high inflation regimes. They stress that the deterioration of money as a
basic mechanism to simplify economic decisions and provide information about
relative scarcities hinders economic activity and resources allocation. At the same time
the erosion of the role of money as a store of value leads to the shortening of contracts
term, severely reducing financial intermediation. In this case, monetary institutions can
eventually be themselves a source of non-neutralities.
4
In fact, a number of non-neutralities emerging from high inflation environments have
been pointed out in the literature: Excessive relative price variability (Fischer, 1981;
Blejer, 1983; Tommasi, 1992; Ball and Mankiw, 1995), the emergence of high search
costs (Sheshinski and Weiss, 1977), the negative effects of inflation on economic
performance (Harberger and Edwards, 1980; Harberger,1988; Kormendi and Meguire,
1985; Rodrik, 1990; Barro, 1995, 1996; Bullard and Keating, 1995) and on financial
intermediation (Roubini and Sala-i-Martin, 1995; De Gregorio and Guidotti, 1995), are
some examples of these non-neutralities.
Focusing on the empirical evidence on long-run money neutrality, Bullard (1999) in an

excellent review of the empirical evidence on the topic stresses that the notion of
neutrality refers to a hypothetical experiment, not directly observed in actual
economies of a permanent one-time unexpected change in money supply on prices
and real quantities.
Early tests of money neutrality, based on regressing the level of real output on money
were criticized and proved to be inconsistent by Lucas and Sargent because of being
based on reduced form models, and not testing for permanent changes in money. It
was not until Nelson and Plosser (1982) showed that macroeconomic time series can be
in general well described as non-stationary autorregresive processes, that the idea of a
permanent change in a macroeconomic time series began to be econometrically
handled.
Lucas (1980) provided prima facie evidence of a strong and close to proportional
relationship between money and prices in the US for the period 1953-1977 at low
frequencies. Later on, McCandless et al. (1995) confirmed the same strong correlation
for set of 110 countries over a 30 years period.
The evidence also tends to show that in most economies there is no long run
correlation between monetary evolution and real GDP (Kormendi and Meguire, 1984;
Geweke, 1986). This evidence is, however, less robust. For example, McCandless and
Weber (1995) found no correlation between money and GDP growth when considering
their complete sample of 110 countries. But when they restrict the sample to OECD
countries the correlation between money growth and real GDP growth tends to be
moderately positive.
Although quite robust across countries, these correlations do not constitute a proof of,
strictly speaking money neutrality. As stressed by Bullard (1999), such a proof
requires identifying permanent or at least highly persistent shocks to the money stock
that are correlated with prices and at the same time uncorrelated with real variables.
In line with the Lucas-Sargent critique, Fisher and Seater (1989, 1993) developed a test
of long-run neutrality of money that evaluates whether such shocks to money supply,
if present; have the impact predicted by the neutrality hypotheses on nominal and real
variables. Later on King and Watson (1997 evaluated these hypotheses using a wide
range of observationally equivalent models and found little evidence against the long-
run neutrality proposition when they studied the postwar period (1950-1990) in the US.
More recently, additional evidence on the money prices and output correlations,
incorporating data for the Great Moderation period (De Grawe and Polan, 2001),
showed that the strong, close to one correlation found by Lucas (1980) and McCandless
5
et al. (1995) weakens once periods or countries with a lower long-run trend inflation
are considered, suggesting that this long-run correlation could be subject to breaks.
Sargent and Surico (2011) have recently explored this idea for the US economy.
Covering the period 1900 to 2005, they revise the low-frequency correlation between
money growth and inflation found by Lucas (1980) for the period 1953-1977. Using a
time varying coefficients VAR and a DSGE model that incorporates a policy rule, they
found that the Lucas (1980) unit slope for this period changes substantially for other
periods, corroborating that the findings of Lucas (1980) can be attributed to monetary
policy responding weakly to inflationary pressures.
When looking at the empirical evidence on Argentina, Bae et al. (2000) apply the Fisher
and Seater methodology to low frequency data of Argentina and Brasil over the period
1884-1996 to test long-run neutrality. They find that increases in money growth lead to
declines in output growth i.e. a negative non-neutrality of the negative Tobin type-.
This non-neutrality is robust to the introduction of dummies controlling for episodes of
financial disruptions in the 90s. Gabrielli et al. (2004) found differences in the bivariate
dynamics of money and prices for the periods of high (1979-1989) and low (1991-2001)
inflation using VAR bivariate models. More recently Basco et al. (2009) studied the
regime dependence of the long-run relationship between money and prices over the
period 1977-2006 and found that proportionality holds for the high inflation period but
weakens once inflation lowers. Their findings are in line with the instability and
regime dependence of the long-run money prices relationship found by Sargent and
Surico (2011) for the US economy.
Quite recently Bozzoli and della Paolera (2014) adopt a long-run view to study the
monetary history of Argentina over the period 1890-2010. They use descriptive analysis
to look at the money-prices relationship and find a break with the quantity theory in
periods of price stability, whereas a proportional relationship between money and
prices reappears during periods of high inflation, also in line with the findings of
Sargent et al. (2011).
Regarding the empirical evidence on the type of non-neutralities associated to high

inflation and high monetary instability, Frenkel (1989) studied the shortening effects on
time horizon of the relevant economic decisions and contractual structure of the
economy. Tommasi (1992), Dabs (2000) and Castagnino and DAmato (2013) study
the relationship between inflation and relative price variability. More recently,
Burdisso, Corso and Katz (2014), when focusing on portfolio allocation, associate
domestic financial disintermediation and dollarization of portfolios during the high
inflation experience in Argentina to the perverse Tobin effect.
In this paper we will explicitly test the neutrality proposition for Argentina over the
period 1900-2012. Differently to the approach adopted by Bae et al. (2000), who use
dummies to control for episodes of monetary disruptions, we investigate whether the
validity of the long-run neutrality prepositions holds depending on the inflationary
regime in force. Argentina is a particularly interesting laboratory to develop this
exercise because, over the span we consider, it went through periods of low, moderate
and high inflation, and two hyperinflation episodes. Along with this pronounced
nominal instability there were recurrent de facto and de jure changes in the monetary
regime, including several reforms of the Central Bank chart that radically changed its
mandate and degree of independence.
6
III. Argentina: a lab of (failed but relevant) monetary experiments
Appealing to historical data of a specific country to evaluate the validity of a

theoretical prediction such as money neutrality could be problematic if the data does
not provide enough variability as to generate meaningful econometric tests. This is
specially the case for countries enjoying enough nominal stability. As suggested by the
quote at the beginning of this paper and cited in the classic study of Alec Ford on the
Argentinean experience with the gold standard- it seems obvious, however, that this
has not been the case of Argentina. Because of recurrent monetary disruptions and
frequent changes in the policy regime, our country offers a kind of great empirical
laboratory to analyze the interaction between nominal and real phenomena.
Many studies have stressed the bias of Argentina to experience frequent episodes of
nominal (and financial) instability. Trying to understand this performance, there was
from very early a rich tradition of studies focused on the history of monetary (and
financial) evolution and its interactions with real phenomena. Williams (1920), Piero
(1921), Prebisch (1922), Ford (1962), Olivera (1964, 1967), Olarra Jimnez (1969), Daz
Alejandro (1970), Ferns (1973), Mallon and Sourrouille (1973) and Vzquez-Presedo
(1971-76), among others, were critical milestones in such a classic lineage. More
recently, the stream of research initiated by Cortes Conde (1989) with its classic Money,
Debt and Crises and followed by Della Paolera with Ortiz (1995) and with Taylor (2001)
and Gerchunoff et al. (2008) are too part of that rich tradition. Finally, among many
others, Canavese (1979), Frenkel (1979, 1989), Heyman (1986), Heyman and
Leijonhufvud (1995) are important steps in the understanding of the disruptive effects
of high inflation.
Although some of those studies adopted a narrative approach, many of them opted for
a more quantitative avenue. Unfortunately, the availability of long and homogenous
official time series for the relevant nominal and real variables in Argentina is not an
easy issue because there are no complete official series covering the period of interest
of this study (1900-2012).1 Many of those studies tried to solve the problem appealing
to original sources and elaborating its own ones.
Taking advantage of these previous efforts, we continue with the task of producing
homogenous time series of relevant macroeconomic aggregates and prices. The job
required a special effort. The setting up of the database implied the consultation of
several sources, trying to use the information as close as possible to the official or
primary data supplier. In general, from this process several series covering different
sub-periods were obtained for each variable of interest. Then, the series were
constructed linking up the various series consulted for the same variable, either using
data in levels or the annual percentage changes, and giving prominence to the latest
series when overlaps were observed. The database reflects annual average of monthly
or quarterly data. Besides, the series constructed were compared to some of the most
relevant historical databases of the Argentine economy available, such as IERAL
(1986), Vzquez-Presedo (1988 and 1994), Della Paolera and Taylor (2003), Gerchunoff
1Recently, the Central Bank of Argentina has provided homogenous monetary series since 1941
but there are not official chained index for the real GDP for the different base years available,
and official chained CPI series are available only from 1943.
7
and Llach (2003) and Ferreres (2005). The specific methodology and sources of
information of the series used in this paper are described in the Appendix.
Argentina's economy holds the dubious honor of having one of the highest inflation
records internationally. In the period considered in this study the average annual rate
of inflation has been 35.5%. However, as discussed in detail in the following sections,
throughout this long period there have been very different stages of nominal behavior.
Until the first half of last century Argentina experienced very low inflation (the average
annual rate was 1.7%), partially explained by the presence of several deflationary
records. The result was a significant variability in inflation (standard deviation of 8%
and a coefficient of variation 4%). From 1945 inflation became moderate and chronic,
reaching an average annual rate of 25.9% until mid-seventies. In 1975, after a period of
price controls and strong repressed inflationary pressures, the economy experienced an
inflationary outburst. This episode, known as the Rodrigazo, led the economy to a
period of high inflation that lasted for fifteen years, ending up two hyperinflationary
episodes in 1989/1990. During this chaotic period, inflation registered annual records
of three digits associated with the monetization of significant fiscal deficits and
exhibited an extremely high variability (st. dev. of 800%). In 1991, the implementation
of a currency board scheme, the Convertibility Plan, and a broad economic reform
allowed the economy to enter a period of nominal stability over which inflation was on
average close to cero for almost eight years. This scheme ended in an economic and
financial crisis in 2001, leading the peso to a sharp depreciation along 2002. Contrary to
expectations based on the previous inflationary history of Argentina, the sharp
depreciation of the peso did not imply the acceleration in inflation in the aftermath of
the crisis. However, during the 2000s, inflation rates have grown back to persistently
moderate levels after 2007.
As can be seen from Figure 1, over the sample period prices followed very closely the
dynamics of money. Money, measured by M2? bimonetary, grew at an annual average
rate of 39%, although exhibiting very high volatility (std.dev.X)
Figure 1: Money and prices in logs. 1900-2012

30
20
(Logs of CPI, M3 bim.)
Log(M3 bim)
10 Log(CPI)
-10
-20
-30
0
0
00
20
40
50
60
70
80
90
00
10
1
3
19
19
19
19
19
19
19
19
19
19
20
20
This chaotic nominal evolution implied large transfers of wealth. In different

inflationary episodes, holders of domestic financial assets have experienced very
significant capital losses. Since real interest rates were mostly negative in times of high
8
inflation (see Figure 2). Thus, not only holdings of currency suffered these losses but
also holding in saving accounts and time deposits. Figure 3 shows money holdings
losses in terms of GDP of different monetary aggregates experienced by the public
between 1901 and 2012.2,3
Figure 2: Real deposit interest rates (annual %)

1901-2012
40%
20%
0%
-20%
(Annual %)
-40%
-60%
-80%
-100%
19 3
19 9
19 5
19 9
20 7
20 1
19 1
19 5
19 9
17
19 1
19 5
33
19 7
19 1
49
19 3
19 7
19 1
19 5
73
19 7
19 1
19 5
19 9
19 3
20 5
09
1
9
0
0
0
0
2
2
3
4
5
5
6
6
7
8
8
8
9
0
19
19
19
19
19
2 Note that transfers of wealth have been from the holders of monetary assets to the issuers of
such instruments: the government in the case of currency in circulation and banks in the case of
deposits. That is, the public sector shared in many cases the inflation tax with financial
institutions. However, sometimes the mechanism used by the government to capture some of
that revenue has been raising reserve requirements of entities (although at some stages they
have earned interests). See Brock (1989).
3
The inflation tax of the different aggregates was estimated according to the following
calculation:
- For currency in circulation and current account deposits:
M t t where:
Pt 1 t
M t is currency in circulation or deposits in period t .
Pt is the consumer price index in t and t is the inflation rate in t .
t is measure in years (from 1941 on is measure in months, because data is available and
monthly frequency becomes more relevant for periods of high inflation).
- For fixed time deposits and savings accounts, the corresponding nominal interest rate was
taken into account:
M t t it where:
Pt 1 t
it is the relevant nominal interest rate.
9
Figure 3: Inflation tax (% of GDP)
1901-2012
35% Inflation tax - M3
Inflation tax - M2
30%
Inflation tax - M1
25% Inflation tax Currency
20%
(% of GDP)
15%
10%
5%
0%
-5%
-10%
-15%
01
06
21
26
46
51
66
71
86
91
11
11
16
31
36
41
56
61
76
81
96
01
06
19
19
19
19
19
19
19
19
19
19
20
19
19
19
19
19
19
19
19
19
19
20
20
Along with the mentioned nominal instability, the ratio of monetary aggregates to
GDP indicate a trend towards monetization until the mid 40s, a demonetization phase
during the moderate and high inflation periods, reaching a minimum level by the end
of the 80s with the hyperinflation episodes, and a new monetization stage afterwards.
High volatility characterized the evolution of these rations alongside this trends (see
Figure 4).
Figure 4: Ratios of monetary aggregates to GDP

1900-2012
50%
45%
40%
35%
30%
(% of GDP)
25%
20%
15%
10%
5%
0%
19 0
19 4
19 8
19 2
19 6
19 0
19 4
19 8
19 2
19 6
19 0
19 4
19 8
19 2
19 6
19 0
19 4
19 8
19 2
19 6
19 0
19 4
19 8
19 2
20 6
20 0
20 4
20 8
12
0
0
0
1
1
2
2
2
3
3
4
4
4
5
5
6
6
6
7
7
8
8
8
9
9
0
0
0
19
M1 bim. M3 bim.
Cross correlations provide a first insight into the relationship between money growth
and inflation and money growth and GDP growth. Figure 5 shows a strong and close
to unit correlation between annual money growth and inflation (0.97); and negative
and close to zero between annual changes of GDP and money growth (-0.16). In the
10
next section we will draw on a methodology to analyze in a more rigorously and
systematic the relationship between these variables.
Figure 5: Changes in money, prices and GDP M2?

(1900-2012)
3.5 .20
3.0
.15
2.5
.10
Dlog(real GDP)
2.0
Dlog(CPI)
.05
1.5
.00
1.0
-.05
0.5
0.0 -.10
-0.5 -.15
0 1 2 3 0 1 2 3
Dlog(M3 bim) Dlog(M3 bim)
IV. The empirical approach
To evaluate the validity of the long-run neutrality propositions for Argentina we use
the methodology of Fisher and Seater (1993), who formalize the notions of long-run
neutrality and superneutrality in an ARIMA framework and derive testable restrictions
which depend on the order of integration of the variables.
Fisher and Seater begin by pinning down the definition of long-run money neutrality
(LRN) as the notion that exogenous permanent changes in money supply ultimately
lead to proportional changes in the price level and other nominal variables, leaving real
variables unchanged. Long-run superneutrality (LRSN) states that exogenous
permanent changes in the rate of growth on money supply ultimately lead to
proportional changes in the nominal interest rate but do not have any impact on the
level of real variables.
To develop their test of long run money neutrality Fisher and Seater restrict their
analysis to a system of two variables with stationary, invertible ARIMA representation,
including a measure of money as one of the variables. Working with bivariate models
implies not considering the complete set of variables and relationships implied in a
structural model as for example a monetary rule describing the behavior of the central
bank. As stressed by Fisher and Seater and later by King and Watson (1997), the order
of integration of money and the other variables is relevant in this setting because in the
absence of knowledge about the structural model, inference about long-run neutrality
and superneutrality requires the data to be non-stationary in levels -i.e. to contain
permanent stochastic changes- in line with their definition of long-run neutrality and
superneutrality.
11
Following Fisher and Seater notation, let m be the log of nominal money supply M and
let y be an interest rate or the log of some other variable Y, such as the price level or
real GDP. Let call m the order of integration of m. Let 1 L . The growth rate of
money supply is denoted by m and m m 1 . Then, the bivariate ARIMA
representation is given by:
a( L) mt b( L) yt ut
m y
(1)
d ( L) yt c( L) mt wt
y m
where a0 d 0 1 and b0 and c0 are not restricted. The vector u t , wt ' is assumed to be
independently and identically distributed with mean zero and covariance .
The experiment consists in evaluating the extent to which m , m , y and y are

changed by an exogenous permanent money-supply disturbance u. To do so, the long-
run derivative (LRD) of zt j yt with respect to xt i mt , where i and j are equal
to 0 or 1. is defined as:
z t k u t
lim xt k u t 0, then LRD z , x lim (2)
k k xt k u t
When the lim xt k ut 0 in (2), there are no permanent changes in the monetary
k
variable, and thus there is not LRN or LRSN experiment to examine. Putting this case
aside, the limit of the ratio expresses the ultimate effect of a monetary disturbance on
z relative to that disturbances ultimate effect on x .
As explained with detail by Fisher and Seater (1993), the order of integration of the
time series of x and z and, more precisely, their relative order integration is crucial in
their setting for the LRD to be defined. Table 1 summarizes the four possible cases in
terms of the relative order of integration of the time series and their implications for
the value of the LRD and for the testing of LRN and LRSN.
Table 1: The Long-run Derivative
Order of integration LRDz,x
(i) x <1 undefined

(ii) x - z >0 0
(iii) x - z =0 can be tested
(iv) x - z = -1 can be tested
Note that to empirically calculate and evaluate LRDz,x, identification restrictions have
to be imposed on the bivariate system (1), as to obtain an impulse-response
representation for x and z and quantify the effects of exogenous shock to money-
supply on monetary aggregates or GDP growth. In fact, Fisher and Seater assume that
money-supply is long- run exogenous to zt, what implies that b(1) in system (1) is equal
12
to zero. As pointed out by Fisher and Seater /1993) and later on by King and Watson
(1997), other identification restriction can be used to test long run neutrality, In fact
King and Watson adopt the strategy of using different identification restriction to
calculate LRDz,x and check if different observationally equivalent models lead to the
same result.
Here we follow the Fisher and Seater empirical methodology, that consists in using the
Barlett estimator of the frequency-zero regression coefficient, in the regression of y
y
on m , assuming that money-supply is exogenous to the zt variable in the bivariate

m
system (1).4. This estimator is given by lim k where k is the slope coefficient from
k
the regression:
yt yt k 1 k k mt mt k 1 ekt (2)
when y m 1 .
According to (2), bk is the slope between the money growth rates and y growth rates.
The Barlett estimator is the limit of this slope as the span over which those growth
rates are computed goes to infinity.
On the other hand, when y 1 and m 2 , the regression is:
yt yt k 1 k k mt mt k 1 ekt (3)
and k has a similar interpretation.

The estimates of k were obtained for k=1,,30 and a 95% confidence intervals
corrected by Newey and West (1987) technique, which were constructed from a t
distribution using the number of observation divided by k as degrees of freedom. In
the next section we analyze the order of integration for the different monetary
aggregates, prices and real GDP.5
Testing the unit roots
As stressed previously, assessing the order of integration of the time series of interest is
a key feature for the testing of long run neutrality. Many macroeconomic series show a
high degree of persistence, and sometimes it becomes quite difficult to distinguish
between a high degree of persistence and a permanent shock. Unit roots diagnostics
tests have been developed to classify macroeconomic variables into those that have
been subject to permanent shocks and those that have not. Nevertheless, these kinds of
tests are far from perfect and face empirical limitations. As pointed out by Maddala
4
Altough cointegration techniques have been proposed and used to test the long-run neutrality of money,
Fisher and Seater (1993) use some examples in their paper to illustrate that cointegration is neither
necessary nor sufficient for LRN or LRSN.
5
Our sample, as Fisher et. al (1993) sample, are annual data that includes more than one
hundred observations. Like them, we consider till k=30 as the empirical limit of k .
13
and Kim (2004) some of these tests have problems of low power -e.g. the augmented
Dickey- Fuller (ADF) test- or size distortions -e.g. the Phillips-Perron (PP) test-.
Taking into account the Monte Carlo evidence showed in the literature (Schwert, 1989;
De Jong, 1992; Agiakoglou and Newbold, 1992), and following Maddala et al. (2004)
advice, we have decided not to use the popular ADF neither PP unit root tests.6 Given
that one of the central problems with unit root tests based in autorregresive processes
are MA errors, the original PP test was designed to pay attention to MA errors. Even
so, it suffers from severe size distortions when the MA root parameter is large
(Schwert, 1989).
For this reason, useful modifications of these tests are evaluated below. Ng and Perron
(2001) proposed modifications of the PP test to correct the size distortions caused by
MA errors. Two modified versions of PP test, MZ and MZ t statistics, are presented
based upon GLS detrended data.7 Furthermore the test developed by Elliot,
Rothenberg and Stock (1996), henceforth ERS, is tested as well. The ERS test is a
modification of the ADF test, and it has the advantage of being the second best when
uniformly most powerful test does not exist.8 This test is also based on the quasi-
differencing regression like the modified versions of PP test. Taking into account these
recent developments in unit root tests we evaluate the stochastic behavior of the data
under study namely, monetary aggregates, prices and real GDP using both, the Ng-
Perron and the ERS test.
Table 3 presents the results of both tests for our variables of interest for the sample
period 1900-2012. Considering the log level of the CPI, the Ng-Perron test regardless
the specification has a constant or has a constant and a linear trend both statistic tests
fall inside de acceptance region (they do not reject the null hypothesis of a unit root).
When the difference in CPI logs is tested, the results depend on the test specification:
when a constant is considered both modified versions of PP reject the null hypothesis
of unit root. When a linear trend is added the presence of a unit root at 5% significance
level for both tests is rejected, but when the significance level is 1% the null hypothesis
is not rejected. In fact, the presence of a linear trend in the inflation rate is not a realistic
assumption, moreover when the span is a century. This result could be biased by the
presence of structural breaks possibly related to regime changes, as we show later on.
The statistical conclusions from ERS tests are exactly the same as Ng-Perron tests.
Thus, whether the inflation rate could have or not a linear trend, the CPI would be
considered I(2) or I(1) respectively.
Regarding the different money aggregates Table 3 do not show a clear-cut on whether
they should be treated as I(1) or I(2) variables. In the case of the Ng-Perron test at 5%
level of significance, the null hypothesis of the presence of a unit root in the logs
6 In Maddala and Kim (2004), chapter 4, the authors said hence, ADF and PP test, still often
used, should be discarded in favor of these tests (referring to the PP and ADF modifications
tests).
7 Elliot, Rothenterberg and Stock (1996) define a quasi-difference of y in order to detendred the
t
data, so that the explanatory variables (constant or/and lineal trend) are taken out of the data
prior to running the unit root test regression.
8 Uniformly most powerful test does not exist for the unit root hypothesis. A consequence of
this fact is the large number of unit root tests on the literature. See Stock, 1994, and Maddala
and Kim, 2004.
14
differences should be rejected, for all variables for both statistics ( MZ and MZ t ) and
thus all variables should be considered I(1), regardless the exogenous variables added
to the specification test. In contrast, at the 1% level of significance, the presence of a
unit root in the logs differences of currency, M1, M2 and M3 would not be rejected
implying that they should be considered I(2). On the other hand, the monetary base is
clearly I(1), for both modified versions of PP test, despite the exogenous variables
included in the test specification. Finally, The ERS unit root tests leads to the same
conclusions for all variables but currency, for which there is stronger evidence that
could be treated as I(2).
Regarding the real variables, both the GDP and real money balances are undoubtedly
I(1) regardless of the exogenous variables considered to perform the unit root tests.
Table 3: Unit root tests
H0: the series has a unit root

Perod: 1900-2012 - HAC corrected variance (Bartlett kernel)
Ng-Perron test Elliott-Rothenberg-Stock Test

Exogenous:
Exogenous: constant Exogenous:
Exogenous: constant constant and linear
Variables and linear trend constant
trend
MZa MZt MZa MZt ERS test ERS test
Log(IPC) 1.760 1.641 -1.471 -0.753 79.750 55.499
Log(IPC) -16.714 -2.891 -19.706 -3.126 1.470 4.641
Log(IPC) -55.710 -5.276 0.447
Log(Currency) 1.989 2.065 -1.299 -0.681 101.862 59.215
Log(Currency) -9.190 -2.124 -17.732 -2.953 3.279 5.310
Log(Currency) -42.408 -4.597 0.684
Log(Monetary base) 1.982 2.192 -1.286 -0.687 115.263 60.840
Log(Monetary base) -22.350 -3.342 -27.262 -3.680 1.119 3.360
Log(M1) 2.014 2.164 -1.283 -0.677 109.530 59.807
Log(M1) -11.816 -2.420 -19.154 -3.074 2.404 4.836
Log(M1) -52.253 -5.108 0.498
Log(M2) 2.005 2.143 -1.364 -0.706 108.551 57.154
Log(M2) -11.863 -2.428 -18.467 -3.015 2.341 5.022
Log(M2) -54.787 -5.231 0.467
Log(M3) 1.935 1.999 -1.462 -0.743 100.648 54.886
Log(M3) -10.361 -2.270 -15.906 -2.792 2.641 5.817
Log(M3) -55.505 -57.730 0.460
Log(Real GDP) 1.550 4.099 -4.969 -1.515 663.480 21.714
Log(Real GDP) -40.260 -4.453 -51.181 -5.058 0.809 1.797
Log(Real M3) 0.888 0.688 -8.913 -2.111 58.328 10.872
Log(Real M3) -25.667 -3.565 -41.550 -4.554 1.294 2.447
Elliott-Rothenberg-Stock
Ng-Perron (2001, Tabla 1)
(1996, Tabla 1)
1% -13.80 -2.58 -23.80 -3.42 1.95 4.23
Asymptotic critical
5% -8.10 -1.98 -17.30 -2.91 3.117 5.642
values
10% -5.70 -1.62 -14.20 -2.62 4.189 6.798
HAC corrected variance (Bartlett kernel)
15
V. Empirical results
Following Fisher and Seater (1993), we use the Barlett estimator to calculate de long-
run derivate LRD according to equations (2) and (3) depending on the order of
integration of the respective time series.
We consider five money aggregates: Currency in circulation, the monetary base, M1,
M2 and M3 and test the validity of long-run neutrality hypothesis with respect to both
prices and real GDP.9
In Figure 6 we present the results of the long-run neutrality test of the five money
aggregates with respect to prices. There, the doted blue lines show the evolution of the
betas considering 1 to 30 lags and its appropriate confidence intervals while the red
line represents the null hypothesis of LRD p ,m equal to 1, i.e. permanent changes in the
money supply should lead in the long run to changes of equal magnitude in prices. In
all cases the null is rejected and the estimated betas seem to converge to a value that
exceeds 1, indicating that the relationship between different measures of money and
prices is more than proportional.
9
These variables are defined in the Appendix.
16
Figure 6: Long run neutrality money and prices. Annual data 1900-2012
Currency and prices Monetary base and prices

1.10 1.13
1.08 1.10
1.06
1.08
Estimated beta
1.04
Estimated beta
1.05
1.02
1.03
1.00
neutrality 1.00
0.98
neutrality
0.96 0.98
0.94 0.95
0.92 b_k 1900-2012 0.93 b_k 1900-2012
0.90 0.90
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
k k
M1 and prices M2 and prices
1.120 1.120
1.100 1.100
1.080 1.080
Estimated beta
Estimated beta
1.060 1.060
1.040 1.040
1.020 1.020
1.000 1.000
neutrality neutrality
0.980 0.980
0.960 0.960 b_k 1900-2012

b_k 1900-2012
0.940 0.940
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
k k
M3 and prices
1.14
1.12
1.10
Estimated beta
1.08
1.06
1.04
1.02
1.00
0.98 neutrality
0.96 b_k 1900-2012
0.94
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
k
Figure 7 shows the results of the test for the money-GDP relationship. In this case the
null hypothesis is LDR y ,m equal to 0, meaning that permanent changes in money do
not lead to any long-run effect on real GDP. Again, in this case we can reject the null
for all the money aggregates and the betas seem to converge to a negative value,
indicating the presence of negative long-run non-neutralities.
17
Figure 7: Long run neutrality money and real GDP. Annual data 1900-2012
Currency and real GDP Monetary base and real GDP

0.000 0.000
-0.005 -0.005
-0.010
Estimated beta
-0.010
Estimated beta
-0.015 -0.015
-0.020 -0.020
-0.025 -0.025
b_k 1900-2012 b_k 1900-2012
-0.030 -0.030
-0.035 -0.035
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
k k
M1 and real GDP M2 and real GDP
0.000 0.000
-0.005 -0.005
-0.010 -0.010
Estimated beta
Estimated beta
-0.015 -0.015
-0.020 bo -0.020
-0.025 -0.025
b_k 1900-2012 b_k 1900-2012
-0.030 -0.030
-0.035 -0.035
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
k k
M3 and real GDP
0.000
neutrality
-0.005
-0.010
Estimated beta
-0.015
-0.020
-0.025
b_k 1900-2012
-0.030
-0.035
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
k
These findings are not completely new. In fact, Bae et al. (2000) using the same
methodology to study long-run money neutrality in Argentina and Brazil during the
period 1884-1996 have a similar result: Money is neutral with respect to output in both
countries, but not superneutral.10 They refer to this finding as an opposite Tobin
effect. They check if the rejection of long-run superneutrality is related to the presence
of anomalous events. In order to control for these events, they introduce intercept
10We do not test superneutrality for the whole period because we find that money is not long-
run neutral with respect to both output and prices and, as mentioned before in Section IV, long-
run neutrality is a necessary condition for long-run superneutrality.
18
dummies for banking crisis episodes.11 The introduction of these dummies does not
change their general results.
We depart form their approach since our presumption is that the non neutralities that
we find for the complete period could be due to the presence of regime changes in the
sample. Thus, we investigate the presence of structural breaks in there relevant time
series and their coincidence.12
In fact, pronounced coincident breaks in the time series of money and prices over the
period 1900-2012 can be detected by simple visual inspection (see Figure 1).
Additionally, the finding of a linear trend in inflation, difficult to explain from an
intuitive point of view, suggests the presence of regimes changes. Structural breaks in
money-prices relationship were studied by Basco et al. (2009) for the period 1977-2006.
Also, DAmato and Garegnani (2013), when studying inflation dynamics in Argentina
over the period 1960-2006, identify structural breaks in this time series using the Bai-
Perron test.
In the following section we test for the presence of multiple breaks in money
aggregates, prices and velocity to identify relevant sub-periods in the evolution of
nominal variables.13 Our guess is that these breaks would probably be related to
relevant changes in nominal regimes that can be identified with a narrative description
of the evolution of monetary frameworks in Argentina.
Identifying structural breaks in time series
To test for the presence of multiple breaks we appeal to the battery of tests developed
by Bai and Perron (1998, 2003), which are quite general and flexible, something
particularly attractive for the time series of Argentina.
The Bai-Perron (1998, 2003) methodology allows estimating multiple partial breaks for
a subset of parameters in linear models. Thus, the method can be applied to pure or
partial structural change models. Bai et al. (1998, 2003) also developed a procedure to
construct confidence intervals for break dates, allowing for different distribution for
the data and errors and different serial correlation in the errors as well. They provide
three type of tests: (i) a test of no break vs. a fixed number of breaks, (ii) two tests of no
break against an unknown number of breaks, the Double Maximum Tests and (iii) and
a sequential test of l versus l+1 breaks, to select the number of breaks which has
advantage relative to information criterion as BIC and LWZ, since it takes into account
potential heterogeneity across segments.
Given the changing dynamics of the time series of nominal variables in Argentina, we
choose the most flexible estimation procedure. Thus, we test breaks in the mean values
11
In doing that, they follow Boscher and Ostrok (1994) and Haug and Lucas (1997).
12 As a cross check exercise, we introduced intercept dummy variables to control for crisis and
anomalous periods. Similar to the findings of Bae and Ratti (2000) these controls are statistically
significant but do not change the non neutrality results. The results of this exercise are
disposable upon request
13 In spite of not being a nominal variable, we study the behavior of money velocity too. The
reason is that this variable resumes the evolution of real GDP and money real balances and can
give us a sense of the response of the public in terms of money demand to the signals coming
from nominal (and real) instability.
19
of the time series of money aggregates, prices, velocity. In all cases the regression
model adjusted was an autoregressive process with one lag and a HAC covariance to
control for heteroskedasticity and serial correlation.14 However we consider a partial
structural change model where only the mean is subject to shift.
Table 8: Multiple breakpoint tests for the mean. Annual data 1900-2012
Bai-Perron global Global plus Sequential

Schwarz Information
breakpoint test (L Bai-Perron test (L
Criteria (L max=4)
max=4) max=4)
H0: no breaks vs. H0: L breaks vs.

H1: L breaks (with
H1: L+1 breaks
UDmax)
3 2 2
M3 growth rate
1942, 1975, 1991 1975, 1991 1975, 1991
3 3 2
Inflation rate
1945, 1975, 1991 1945, 1975, 1991 1975, 1991
3 2 3
M3 velocity
1957, 1975, 1991 1975, 1991 1957, 1975, 1991
The years indicate break and start of period

The break dates are specified according to the Bai-Perron critical values (Econometrics Journal, Vol 18, 2003)
In Table 8 the results of Double Maximum Umax test and the sequential supF(l+1, l)
test for the time series of the M3 bimonetary aggregate, inflation, money velocity and
are presented. We find three significant structural breaks: 1942/1945/1957, 1975 and
1991, depending on the variable selected and the test. Not surprisingly, 1975 and 1991
represent structural breaks that coincide for all the series considered. The first date
corresponds the year of the inflationary outburst known as the Rodrigazo after a
period of price controls and strong repressed inflationary pressures. The second break
corresponds to the introduction of the convertibility regime after two hyperinflation
episodes.
The previous break is very close but not the same for money and prices -1942 in the
case of M3 and 1945 in the case of inflation. The II World War had undoubtedly an
impact on the behavior of both variables. On the one hand, it appears to be a monetary
impact of the huge accumulation of trade balance surpluses from 1941. On the other
hand, the break in inflation in 1945 coincides with the end of the war, a moment in
which world supply was severely disrupted while at the same time world demand
began to increase sharply. However, the finding of a break in both years, 1942 and
1945, indicates that the changes in money and inflation where rather permanent and
thus, other causes, more related to domestic policies should lie behind these two
breaks. In fact, these years marked the end of a regime of well established nominal
stability since the start of twenty century and the entrance into a period of moderate
and chronic inflation and financial repression. With the exception of the disruption
caused by the First World War, until the creation of the Central Bank (BCRA) in 1935,
Argentina experienced a period of nominal discipline under the gold standard. In the
mid-forties the objective of controlling excessive money creation to prevent the
14
The HAC (Heteroskedasticity and Autocorrelation Consistent Covariance) covariance matrix
employed was pre-whitening with lags equal 1, Quadratic-Spectral kernel and Andrews
bandwith.
20
building of inflationary pressures, which characterized the first five years after the
creation of the BCRA, was abandoned. In fact, in 1946 the BCRA chart was reformed,
instituting a radically different monetary regime: deposits were nationalized and
commercial banks began to act as financial agents of the BCRA that was assigned the
task of controlling interest rates and directing credit to specific sectors of the economy,
according to the objectives of the central government.
In the case of money velocity there are three structural breaks: 1975 and 1991
coincident with the other variables considered- and 1957. As mentioned above, the
inflationary outburst of 1975 marked the beginning of a high inflation regime; and the
adoption of Convertibility in 1991 led to a drastic disinflation. Both episodes had a
dramatic impact on real money demand. As stressed by McCallum (1989) and others,
rapid changes in trend inflation as those of 1975 and 1991 have a quite permanent
impact on the desire of agents to maintain real money holdings, in the spirit of the
Cagan (1956) model developed to describe hyperinflation episodes. The fact that
money velocity does not break along with money and prices in the 40s can also be
interpreted in the same spirit, since it was not until the end of the fifties that Argentina
began to register truly high inflation records. In most part of this decade price controls
and financial repression probably maintained real money holdings artificially high, but
after 1955 a liberalization process began and key relative prices where allowed to
adjust.15
Looking inside the periods
Having identified the structural breaks in the time series of money, prices and money
velocity, we now turn to evaluate if the non neutralities that we find for the complete
sample in particular are associated to any of the sub-periods in which the breaks split
the sample.
Ideally, the sample should be divided in four periods: 1900-1944, 1945-1974, 1975-1991
and 1992-2012, to be consistent with the identified structural breaks. But using annual
data we lack of the degrees of freedom required to implement Fisher and Seaters
neutrality test. Thus, we first consider two periods: before and after 1975. We analyze
the first one using annual data, since there are not reliable time series at a higher
frequency for this period. This implies not being able to analyze the sub periods
generated by the structural break around 1942 and 1945. The second period -1975-2012-
can be splitted into the two remaining sub periods -1975-1991 and 1992-2012- in line
with the two structural break identified in almost all the time series considered and
analyzed using quarterly data.16 This implies changing the frequency of the data, what
makes the results for both periods not completely comparable, since the quarterly data
incorporate variability related to the business cycle frequency not present in the annual
data.
15 After a big devaluation of the currency and tariffs increases as part of an IMF agreement, in
1959 Argentina experienced for the first time in its economic history a three digit inflation
record (114% annually).
16
We test for the presence of a structural break within the period 1975Q3 -2012Q4 to check if additional
or different structural breaks appear using quarterly data. We identify a break in 1990Q23 for the change
in the M3 money aggregate and one closer for the change in the CPI, in 1990Q2. This is quite consistent
with the break found in 1001 when using annual data.
21
In Figure 8 and 9 we present the results of the test for the first sub period: 1900-1974. It
can be seen from Figure 8, that shows the results for the money and price relationship,
that the evidence is mixed: Permanent changes in money supply lead in the long-run to
changes of equal magnitude in prices for transactional money aggregates but the
changes in prices are more than proportional for broader monetary aggregates (M2 and
M3).17
Figure 8: Long-run neutrality money and prices. Annual data 1900-1974
Currency and prices Monetary base and prices

1.30 1.30
1.20 1.20
Estimated beta
1.10 1.10
Estimated beta
1.00 1.00
0.90 0.90
0.80 0.80
0.70 0.70
b_k 1900-1974 b_k 1900-1974
0.60 0.60
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
k k
M1 and prices M2 and prices

1.30 1.40
1.20 1.30
1.20
Estimated beta
1.10
Estimated beta
1.10
1.00
1.00
0.90 neutrality neutrality
0.90
0.80
0.80
0.70 0.70
b_k 1900-1974 b_k 1900-1974
0.60 0.60
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
k k
M3 and prices
1.400
1.300
1.200
Estimated beta
1.100
1.000
neutrality
0.900
0.800
0.700 b_k 1900-1974

0.600
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
k
Figure 9 corresponds to the money-real GDP relationship. For all monetary aggregates
the null hypothesis of long run neutrality is not rejected, indicating that the negative
non neutrality found for the whole period appears to be a feature of the post-1974
period. That is, money seems to be neutral with respect to GDP over the period 1900-
17 It is important to note that broader monetary aggregates, incorporating the behavior of

banking sector, are more endogenous nature than more restricted monetary aggregates.
Additionally, the M2 aggregate became more transactional over time with the widespread use
of debit cards.
22
1974. This result is not surprising taking into account the mean of inflation was 10.9%
over this period and in fact, that Argentina did not experience high inflation over this
period.
Figure 9: Long-run neutrality. Money and Real GDP. Annual data 1900-1974
Currency and real GDP Monetary base and real GDP

0.160 0.100
b_k 1900-1974 b_k 1900-1974
0.120 0.080
0.060
Estimated beta
0.080 Estimated beta

0.040
0.040 0.020
a
0.000 0.000
neutrality -0.020
neutrality
-0.040
-0.040
-0.080 -0.060
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
k k
M1 and real GDP M2 and real GDP
0.200 0.200
b_k 1900-1974 b_k 1900-1974
0.150 0.150
Estimated beta
Estimated beta
0.100 0.100
0.050 0.050
0.000 0.000
-0.050 -0.050
-0.100 -0.100
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
k k
M3 and real GDP
0.160
b_k 1900-1974
0.120
Estimated beta
0.080
0.040
0.000
neutrality
-0.040
-0.080
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
k
We can only test superneutrality in the case of currency in circulation, because of two
reasons: First, the time series of currency satisfies the neutrality conditions in the
period 1900-1974, a necessary condition for superneutrality to hold and second, we
23
have enough evidence according to the results of the unit roots tests to consider it an
I(2) variable. As can be seen in Figure 10 superneutrality holds in this case: Permanent
exogenous shocks to the rate of growth of currency do not have any permanent effects
on the level of real GDP over the period 1900-1974.
Figure 10: Long-run superneutrality. Currency and real GDP. Annual data 1900-1974
1.0
0.8
0.6
0.4
Estimated beta
0.2
0.0
-0.2
-0.4
beta_k 1900-1974
-0.6
-0.8
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Solid line represents the estimated beta_k coefficients.

Dashed lines are the bound of the 95% confidence interval of the estimated coefficients
Aqu habra que agregar resultados para agregado M2 porque sobre todo para el
segundo subperodo es el agregado transaccional y suprimir la nota al pie.
For the period 1975-2012 we can analyze the two indentified sub-periods: Before and
after the two hyperinflation episodes. For the first sub-period (1975q1-1990q1) we
perform two exercises: (i) including the two hyperinflation episodes, which are in fact
very anomalous and transitory disruptions (1975q1-1990q1) and (ii) discarding them
(1975q1-1988q4). For the second sub-period (1990q2-2012q4), we do a similar exercise:
(iii) the period 1990q2 -2012q4 that includes the sharp decline of inflation that led to a
strong re-monetization of the economy after the implementation of the Convertibility
Plan in April 1991, and (iv) the period 1993q1-2012q4.
For the money-prices relationship, if we consider the hyperinflation episodes (case (i))
the results reproduces the patterns found for the annual period 1900-1974: For a
restricted aggregate as currency, long-run neutrality holds, but for M3 the response of
prices to permanents changes in money is more than proportional.18 If we discard the
two hyperinflations (case (ii)), proportionality holds for both aggregates in the period
18
Figures 11 and 12 show the results for the periods discarding the hyperinflations (case (ii))
and also discarding the strong recovery after the implementation of Convertibility Plan. The
results for these periods (1975q1-1990q1 and 1990q2-2012q4) are available upon request.
24
1975q1-1988q4 (see Figures 11 and 12).19 This result is in line with Sargent and Surico
(2011) who find that proportionality seems to be mostly a feature of high inflation
regimes attributed to monetary policy responding weakly to inflationary pressures, as
it was the case of Argentina over the 70s and 80s, being subject to fiscal dominance.
Looking at the period 1993q1-2012q4 (case (iv)), long-run neutrality holds for currency
but not for M3 (see Figures 11 and 12).
Figure 11: Long-run neutrality. Currency and prices. Quarterly data 1975-2012
1.20
1.00
0.80
Estimated beta
0.60
0.40
beta_k 1975q1-1988q4
0.20
beta_k 1993q1-2012q4
0.00
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Figure 12: Long-run neutrality. M3 and prices. Quarterly data 1975-2012
1.40
1.20
1.00
Estimated beta
0.80
0.60
0.40
beta_k 1975q1-1988q4
0.20
beta_k 1993q1-2012q4
0.00
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

19We also test for monetary base, M1 and M2, and the patterns of these aggregates are quite
similar with the path obtained for the annual data 1900-1974. These results are available upon
request.
25
The results with respect to the long run money-real GDP relationship are quite
interesting. The estimates for the high inflation period (1975q1-1988q4) clearly show
that there are negative long run non-neutralities associated to permanent changes in
money, considering both, currency and the M3 aggregate (see Figures 13 and 14). In
case (iv), 1993q1-2012q4 period, the betas converge to 0, indicating that shocks to the
aggregates currency and M3- are neutral in the long run. Additionally, the
pronounced U-inverted humped form depicted by the betas throughout the transition,
suggest that the transitory effects of shocks to M3 on real activity are clearly positive.
In fact, this is the only period in which the betas remain positive. Note that in this case
we conduct the test using data at a higher frequency. This implies that our data
incorporates some shortrun variability not present at the annual frequency.
Figure 13: Long-run neutrality. Currency and real GDP. Quarterly data 1975-2012
0.35 beta_k 1975q1-1990q1 beta_k 1990q2-2012q4 beta_k 1994q1-2012q4

0.35 beta_k 1975q1-1988q4
0.30
0.30
0.25 beta_k 1993q1-2012q4
0.25
0.20
beta
0.20
beta
0.15
Estimated
0.15
Estimated
0.10
0.10
Neutrality
0.05
0.05
0.00
0.00
-0.05
-0.05
-0.10
-0.10
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
k
k

Figure 14: Long-run neutrality. M3 and real GDP. Quarterly data 1975-2012
26
0.20
beta_k 1975q1-1988q4
0.15
beta_k 1993q1-2012q4
0.10
Estimated Beta
0.05
0.00
-0.05
-0.10
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Summing up, the results of our exercise provide clear evidence that the negative long
run non neutralities of monetary shocks on the real economy that we find in the data
when considering the complete span can be exclusively attributed to the high inflation
period. Regarding the money-prices relationship, proportionality also seems to be
mostly a feature of high inflation environments in which it holds for restricted and
broad measures of money. For the rest of the periods it only holds for the more
restricted money aggregates. The finding of a more than proportional money-prices
relationship in these periods when considering broad money aggregates deserves more
research to be fully understood. Given that broader money aggregates reflect not only
the behavior of the central bank but also that of the public and financial intermediaries,
the relationship between those money aggregates and prices could reflect more
endogenous responses to exogenous shocks to money hat our methodology cannot
identify. In particular, our guess is that the source of a more than proportional
relationship could be associated to the high monetary instability to which economic
agents were subject along the historical period we study -which at different amplitudes
led to sharp positive as well as negative swings in broad measures of money. The
increasing persistence of inflation over this period could probably contribute to this
result too. Overall, this results deserves more to be fully understand.
VI. Conclusions
Using the methodology developed by Fisher and Seater (1993) we test long run money
neutrality for Argentina over the period 1900-2013. The long history of monetary
instability and recurrent changes in the monetary framework that characterize the
history of the country over these long span of time provides enough variability as to
investigate the validity of these propositions. When considering the whole period we
find significant non neutralities of exogenous permanent shocks on both prices and
real GDP: Permanent exogenous shocks in money have a negative permanent effect on
real output. At the same time this shocks reflect in more than proportional changes in
prices.
Since the economy went trough periods of low, moderate and high inflation as well as
two hyperinflation episodes over this long span, we evaluate if the non neutralities that
27
we find are in fact related to any of the periods rather than a feature of the whole
period. We identify structural breaks in the time series of different measures of money
and prices. Based on these breaks, we split the sample and test neutrality for the
identified sub periods. We corroborate that the negative non neutralities of exogenous
permanent shocks to money on real GDP only remain for the high inflation period
experienced by the country between 1975 and 1988 and the two hyperinflationary
episodes. In all the other periods money is neutral with respect to real GDP.
We also find that once we discard the hyperinflation episodes, the proportionality of
prices with respect to money holds for all money aggregates in the high inflation
period, a result in line with recent findings in the literature: Proportionality between
money and prices seems to hold only in those periods in which the monetary
authorities do not successfully respond to inflationary pressures. For the rest of the
periods prices are proportional to money if restricted aggregates as the monetary base
or currency are considered, but shocks to broader money aggregates lead to more than
proportional changes in prices, a finding that deserves more research.
Our findings corroborate that in high inflation environments there are permanent
negative effects of innovations to money on the real economy, a concern of a large
strand of the literature that focused on characterizing high inflation regimes and their
real costs.
28
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Appendix:
The specific methodology and sources of information of the series used in this paper
are described below.
Consumer prices
The main source of information for this variable is the monthly time series of the
Consumer Price Index (CPI) for the Gran Buenos Aires (April 2008 = 100) published by
INDEC in its website. This series links up 1943, 1960, 1974, 1988 and 1999 series. Since
January 2007 (inclusive) the previous series was completed with the monthly changes
in the CPI computed by Buenos Aires City, and from January 2011 on, with the
monthly change calculated by the National Congress (which is an average of several
private estimations of CPI). Annual data was obtained by averaging the monthly
indices of each year.
Before 1943, the CPI series was completed using several sources. Between 1900 and
1913 two sources were consulted: from 1900 to 1910, inclusive, the average annual
variations in the cost of a basic food basket presented in Cortes Conde (1979); and
between 1911 and 1913, inclusive, the average annual changes in the cost of living
index presented in Bunge (1918). These inflation rates match the variations of the CPI
series found in Gerchunoff-Llach (2003).
Finally, between 1914 and 1943 the average annual variations in the living cost of
Buenos Aires city calculated by Direccin Nacional de Estadsticas y Censos
(1963=100), published in Diaz Alejandro (1981), were used.
Gross domestic product
For the period 1900-1935 the data presented in the annex Algunos estudios especiales
y estadsticas macroeconmicas preparados para el informe of ECLAC (1958) was
used. This report exhibited annual series of GDP at 1950 prices for the period 1900-
1955. Because or the absence of GDP deflators or nominal GDP series for this period, an
implicit price index of GDP was constructed by the simple average of the annual
change in consumer and wholesale prices of those years. Consumer prices correspond
to the previously described series of CPI. As for wholesale prices, two sources were
used: 1) for the period 1900-1913, annual variations in the wholesale price index
(1884=100) of Della Paolera and Ortiz (1995); 2) for the period 1914-1935 annual
variations in the wholesale price index (1960=100) from IEERAL (1986).
For the period 1935-1992, inclusive, the GDP series at constant and current prices
published in Martnez (ECLAC, 1999) were used. This publication compiles the
national accounts series at 1950, 1960, 1970 and 1986 prices estimated by the Central
Bank of Argentina. For the period 1993-2006, data of national accounts in 1993 prices
published by the INDEC was considered. Because of the problems addressed in the
official statistics since 2007, the series were completed with data of real and nominal
GDP calculated by ARKLEMS.
The final series of GDP at constant and current prices were calculated completing the
national accounts at 1993 prices backwards with the real and nominal annual
variations obtained from the sources mentioned before.
36
Deposit interest rate
This is one of the variables that presented greater difficulties to set a consistent
historical series. These difficulties are based on the diversity of deposit rates observed
during the period, which reflects different concepts of return, risk and liquidity;
changes in financial instruments; changes in the presentation of information; and
different levels of regulation of the financial system.
In this context, different sources were used to put together a series of interest rate on
deposits in domestic currency for the period of interest. The series tries to reflect
market interest rates, although regulated rates by the Central Bank were used in times
when market rates were not available.
No systematic records of interest rates for the period 1900-1924 were found. To fill this
information gap, advertisements of banks in magazines of the time were used as a
source of data (El Resumen, The Review of the River Plate and Handels-Zeitung).
These ads showed interest rates offered by banks. However, the information is not
homogeneous over time, and it is not uniform across banks, making the construction of
a consistent series a difficult job. To deal with this problem only banks for which
information was available more systematically in the period under analysis were
considered: Banco de la Nacin Argentina, Banco de Italia y del Ro de la Plata, Banco
Alemn Transatlntico, Banco Germnico de la Amrica del Sud and Banco de la
Provincia de Buenos Aires. These five institutions accounted for about half of system
deposits. The interest rate of 3 months deposits in national currency was considered
and simple averages of banks interest rates were calculated. In the absence of monthly
data, the annual average was calculated with the data of December of each year and
December of the previous year.
For the period 1925-1931 no data on deposit interest rates in advertisements or other
sources was found. Only data of discount rates of documents was available in Baiocco
(1937). Then, data was completed assuming a linear decline in the spread, calculated as
the difference between the discount rate of documents and the 90 days deposit rate for
the years 1924 and 1932, and using the mentioned lending rate as reference for the
years in between.
Between 1932-1940 the monthly data of 3 months deposit rates taken from the
Statistical Supplement of Revista Econmica (BCRAs economic journal) was used.
When monthly data was not available (1932-1935), the annual average was calculated
with the data of December of each year and December of the previous year.
From 1940 on, the monthly data of 60 days or more days deposits rates reported by the
Central Bank of Argentina on its website was used. However, the series has gaps in
some years, which are related to the lack of market interest rates due to the regulations
of the financial system. These gaps were filled with regulated interest rates. From April
1946 to June 1962 the series was completed with the regulated fixed-term deposits rates
obtained from Central Banks Memories. Between July 1982 and May 1984 a new hole
in statistics shows up because of the disappearance of market instruments, which was
completed with fixed-term deposits rates set by the Central Bank (taken from the
Supplement of the Statistical Bulletin of the Central Bank of June 1990). Finally,
37
between January and March 1990 there is a new gap, which was covered with non-
regulated savings deposits rates taken from the previous source.
Monetary aggregates
The official data of monetary aggregates published by the Central Bank in the
monetary and financial statistics section of its website begins in June 1940. This data
includes: currency in circulation, monetary base, deposits of financial institutions on
behalf of the Central Bank (needed to define the monetary base during periods of
nationalization of deposits between 1946-1957 and 1973-1977), and bank deposits. In
this last case, data is presented by type of deposit (current account deposits, savings
deposits, fixed-time deposits, other deposits and acceptances), by currency (domestic
and foreign currency, the latter appears discriminated from the mid 1980s), and by
type of depositor (public and private sector). Backwards, monthly data was completed
using various sources, which are described below.
Figures from 1899 to 1900 were taken from Ferreres (2005), which is based on the
statistical bulletin of Direccin Nacional de Estadstica y Censos (DNEC, 1945) and
Della Paolera and Taylor (2003).
For the period 1901-1935 data from Baiocco (1937) was used. For currency in circulation
held by the public and banks, Baiocco consulted Currency Boards monthly balances as
a source of information. Since May 1935 (date in which the Central Bank was created)
data was taken from the Statistical Supplement of Revista Econmica, the economic
journal published by the new monetary authority. This data excluded interbank
deposits and included subsidiary currency, which corresponded to bills and coins of
five pesos or less issued by the National Treasury and not backed by gold during the
previous Currency Board regimen. In relation to banks liquidity, until the creation of
the Central Bank a concept of minimum cash reserves (which included gold and paper
money held by banks) was used; after that the minimum reserve requirements covered
circulation held by banks and current account deposits of banks at the monetary
authority.
In the case of banks deposits, the information of Baiocco has as its source the Bureau
of Economic Research of Banco de la Nacin Argentina (the main public bank before
the creation of the Central Bank in 1935). The data of deposits is not discriminated by
currency denomination (gold or paper money pesos) neither by type of depositor
(private or public sector). From 1926 on, interbank deposits are subtracted and deposits
are classified in current account, savings, fixed-time and other deposits. To
discriminate by type of deposit in previous years, information of deposits taken from
Direccin General de Estadstica (1928) was used. There, the data by type of deposit
emerged from a survey of 27 banks between 1912 and 1926, and from a survey of 13
banks between 1908 and 1911. The shares of each type of deposits for those years were
calculated, and for the period 1901-1908 the average share of 1908-1911 was utilized.
Then these percentages were applied to total deposits series taken from Baiocco (1937).
Finally, from July 1936 to December 1939 monthly data of the Statistical Supplement of
Revista Econmica, the economic journal of the Central Bank, was used.
With the series described before, annual average of monthly data of currency in
circulation (held by the public and by banks), monetary base (currency in circulation
plus banks current account deposits at the Central Bank plus banks deposits on
38
behalf of Central Bank in times of deposits nationalization), M1 (currency in circulation
outside the Central Bank plus current account deposits), M2 (M1 plus savings
deposits), M3 (M2 plus fixed-time deposits, other deposits and acceptances) were
computed, considering local and foreign currency deposits and private and public
sector deposits. Annual averages were used in order to avoid distortions of relevant
indicators, such as ratios to GDP or series in real terms, in periods of high inflation
(because the series of GDP and CPI used as denominators are annual averages).
Monthly data is available just from April 1907, when financial entities started to submit
their balance sheet information to the Treasury on a monthly basis. Thus, for the period
1900-1906, the annual average was calculated as the average of December of each year
and December of the previous year.
39

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A Century of Nominal History in Argentina: Monetary Instability and Non-Neutralities

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A Century of nominal history in Argentina: monetary instability

Emiliano Basco (UBA-BCRA )

JEL classification: C31, C41, C51, C22, C51.

of VII Congreso Internacional de Economa y Gestin, the Jornadas de Econometra 2014 of

Typically considered a disputed and controversial subject, there are no many

It is through these various effects of economic disorganization that monetary

II. The related literature

According to this notion, in equilibrium, real allocations should be independent of the

In standard modern macroeconomic models the influence of the nominal variables in

Non-neutralities have been emphasized by Heymann and Leijonhufvud (1995), when

Focusing on the empirical evidence on long-run money neutrality, Bullard (1999) in an

Regarding the empirical evidence on the type of non-neutralities associated to high

Appealing to historical data of a specific country to evaluate the validity of a

Figure 1: Money and prices in logs. 1900-2012

This chaotic nominal evolution implied large transfers of wealth. In different

Figure 2: Real deposit interest rates (annual %)

Figure 4: Ratios of monetary aggregates to GDP

Figure 5: Changes in money, prices and GDP M2?

Dlog(M3 bim) Dlog(M3 bim)

IV. The empirical approach

The experiment consists in evaluating the extent to which m , m , y and y are

Table 1: The Long-run Derivative

Order of integration LRDz,x

(i) x <1 undefined

on m , assuming that money-supply is exogenous to the zt variable in the bivariate

On the other hand, when y 1 and m 2 , the regression is:

and k has a similar interpretation.

Testing the unit roots

Table 3: Unit root tests

H0: the series has a unit root

Ng-Perron test Elliott-Rothenberg-Stock Test

HAC corrected variance (Bartlett kernel)

Currency and prices Monetary base and prices

0.960 0.960 b_k 1900-2012

Currency and real GDP Monetary base and real GDP

Identifying structural breaks in time series

Bai-Perron global Global plus Sequential

H0: no breaks vs. H0: L breaks vs.

The years indicate break and start of period

Looking inside the periods

Figure 8: Long-run neutrality money and prices. Annual data 1900-1974

Currency and prices Monetary base and prices

M1 and prices M2 and prices

0.700 b_k 1900-1974

17 It is important to note that broader monetary aggregates, incorporating the behavior of

Currency and real GDP Monetary base and real GDP

0.080 Estimated beta

Solid line represents the estimated beta_k coefficients.

Solid line represents the estimated beta_k coefficients.

Solid line represents the estimated beta_k coefficients.

0.35 beta_k 1975q1-1990q1 beta_k 1990q2-2012q4 beta_k 1994q1-2012q4

Solid line represents the estimated beta_k coefficients.

Solid line represents the estimated beta_k coefficients.

Agiakoglou, C. and P. Newbold (1992): Empirical Evidence on Dickey-Fuller type

Bai, J. y P. Perron (2003): Computation and Analysis of Multiple Structural Change

Baiocco, P. (1937): La economa bancaria argentina a travs de sus ndices ms significativos

Ball, L. and G. Mankiw (1995): Relative-Price Changes as Aggregate Supply Shocks,

Barro, R. (1995): Inflation and Economics Growth, Bank of England, Quarterly

Barro, R. and S. Fischer (1976): Recent Developments in Monetary Theory, Journal of

BCRA: Monetary and financial statistics, database in banks Web site

BCRA (various): Statistical Supplement of Revista Econmica.

BCRA (various): Statistical Bulletin.