Testing the long-run neutrality and superneutrality of money in a developing country: Evidence from Iran

This paper investigates the long-run money neutrality (LMN) and long-run money superneutrality (LMSN) hypothesis for both the industry sector and the entire Iranian economy by using the data of 1979–2018 and applying Fisher and Seater's (1993) ARIMA framework. Conventional unit root tests, including PP, ADF, and KPSS, are applied to determine the order of integration of variables; however, since the structural break in variables is not considered in these methods, Lee-Strazicich and Zivot-Andrews methods are also applied to take it into account. The findings of money neutrality investigation in the Iranian industry sector show that when the monetary base is the criterion, money neutrality is confirmed, but when liquidity and money volume are the criteria, money neutrality is rejected. Also, the neutrality of money is accepted considering all three monetary aggregates (M1, M2, and M3) in investigating the entire economy. It is not feasible to examine the superneutrality of money since unit root tests confirm that all the variables are I (1). • As there is more than one structural break in the time series of the study, applying the Lee-Strazicich unit root test has made the results more reliable. • Neutrality of money testing is not efficient in the case of cointegration between model variables. Thus, the Gregory-Hansen test, which investigates cointegration considering the structural break, is applied. • The results of this research can guide policy-makers. • Non-neutrality of money in the industrial sector shows the positive effect of monetary policy on this sector when considering the probability of destructive effects on other sectors.