Long Run Effects of Money on Real Consumption and Investment in the U.S.

This paper tests for long run effects of money on real expenditures in the U.S. over the 1959-2002 period. Real consumption and investment expenditures, as well as their broadly defined components, are examined. We also test for effects of money on long run reallocations of consumption expenditures among durables, nondurables, and services. The time series characteristics of each variable are rigorously investigated. This is followed by application of the long run neutrality test, introduced by Fisher and Seater (1993), to each real expenditures series. Results support long run neutrality of both M2 and M3 with respect to real expenditures for all examined levels of data aggregation.