Testing the hypothesis of long‐run money neutrality in the Middle East

Abstract

PurposeThe purpose of this paper is to test the hypothesis of long‐run money neutrality for Egypt, Jordan and Morocco using seasonal cointegration techniques.Design/methodology/approachThe paper uses seasonal integration and cointegration techniques to test the neutrality of money hypothesis for three Middle Eastern economies, using quarterly data on money, prices and real income. The benefit of using this technique lies in its ability to distinguish between cointegration at different frequencies.FindingsThe empirical results show that money is cointegrated with prices, but not with output at the zero frequency for Egypt, Jordan and Morocco. This suggests that money affects nominal but not real variables in the long run, implying that money is neutral in these three Middle Eastern economies.Practical implicationsThe implication of this finding for policy analysis suggests that the anti‐inflationary policy prescription espoused by the monetarist school should be followed in these three Middle Eastern countries, in order to curb inflation.Originality/valueThe paper provides further evidence in support of money neutrality using an unconventional approach for three developing Middle Eastern economies.