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parameters do not remain constant, Fisher (1911b) claims that money supply
increases could lead to an inflationary process.
4. Model
A means to test the case for money neutrality, is through empirical verification.
That is to say, the effect of money supply in the output level duly adjusted for
inflation is to be performed. Although the result is to abide by customary statistical
structures, its validity holds for a specific period of time. In this respect, a
quantitative test for this proof has a limited validity in time terms. Replication for
further periods would become a convenient procedure in order to find possible
results robustness, seeking to build up a consistent pattern of behavior.
Hence, in order to empirically evaluate the neutrality of money, the following
equation is being proposed:
GDP/p = ƒ(Mi)
(1)
where GDP is the gross domestic product in nominal terms; p is a price index; Mi is
money, whereby i takes the value of 1, i.e. M1, representing coins, paper notes
and deposit accounts; while i takes the value of 2 (M2) it represents M1 plus short
term deposit accounts. The purpose of this equation is to estimate the effect of
money in real output. Money neutrality claims that money, which in this case is
represented by M1 and/or M2, have no effect whatsoever in the level of output duly
17
“We have noted that in these cases, as in others, prices depended on the
quantity of money, its velocity, and the volume of business.” Fisher (1911b).