A note on the neutrality of interest rates

Abstract

We test the neutrality of nominal interest rates taking advantage of recent advances in quantitative financial history using the Schmelzing (2022) global nominal interest rate and inflation rate series (across eight centuries), for France, Germany, Holland, Italy, Japan, Spain, the United Kingdom, and the USA. We pay attention to the integration and cointegration properties of the variables and use the bivariate autoregressive methodology proposed by King and Watson (1997). We argue that meaningful long-run neutrality tests can be performed only for three countries—Japan, Spain, and the United Kingdom—and we find no evidence consistent with the neutrality of nominal interest rates.