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Money Growth And Inflation In The United States

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  • BACHMEIER, LANCE
  • LEELAHANON, SITTISAK
  • LI, QI

Abstract

Specification tests reject a linear inflation forecasting model over the period 1959–2002. Based on this finding, we evaluate the out-of-sample inflation forecasts of a fully nonparametric model for 1994–2002. Our two main results are that: (i) nonlinear models produce much better forecasts than linear models, and (ii) including money growth in the nonparametric model yields marginal improvements, but including velocity reduces the mean squared forecast error by as much as 40%. A threshold model fits the data well over the full sample, offering an interpretation of our findings. We conclude that it is important to account for both nonlinearity and the behavior of monetary aggregates when forecasting inflation.

Suggested Citation

  • Bachmeier, Lance & Leelahanon, Sittisak & Li, Qi, 2007. "Money Growth And Inflation In The United States," Macroeconomic Dynamics, Cambridge University Press, vol. 11(1), pages 113-127, February.
    • Handle: RePEc:cup:macdyn:v:11:y:2007:i:01:p:113-127_05
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    Citations

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    Cited by:

    1. Pär Stockhammar & Pär Österholm, 2018. "Do inflation expectations granger cause inflation?," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 35(2), pages 403-431, August.
    2. Helge Berger & Pär Österholm, 2011. "Does Money matter for U.S. Inflation? Evidence from Bayesian VARs," CESifo Economic Studies, CESifo Group, vol. 57(3), pages 531-550, September.
    3. Robert F. Mulligan, 2015. "Roger W. Garrison and the Integration of Austrian and Mainstream Macroeconomics," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 30(Winter 20), pages 59-79.
    4. Helge Berger & Pär Österholm, 2011. "Does Money Growth Granger Cause Inflation in the Euro Area? Evidence from Out‐of‐Sample Forecasts Using Bayesian VARs," The Economic Record, The Economic Society of Australia, vol. 87(276), pages 45-60, March.
    5. Estrella, Arturo, 2015. "The Price Puzzle And Var Identification," Macroeconomic Dynamics, Cambridge University Press, vol. 19(8), pages 1880-1887, December.
    6. Zongwu Cai & Qi Li, 2013. "Some Recent Develop- ments on Nonparametric Econometrics," Working Papers 2013-10-14, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University.
    7. Qi Li & Jeffrey Scott Racine, 2006. "Nonparametric Econometrics: Theory and Practice," Economics Books, Princeton University Press, edition 1, volume 1, number 8355.
    8. Mossfeldt, Marcus & Stockhammar, Pär, 2016. "Forecasting Goods and Services Inflation in Sweden," Working Papers 146, National Institute of Economic Research.
    9. Chauvet, Marcelle & Tierney, Heather L. R., 2007. "Real Time Changes in Monetary Policy," MPRA Paper 16199, University Library of Munich, Germany, revised Apr 2009.
    10. Kulaksizoglu, Tamer & Kulaksizoglu, Sebnem, 2009. "The U.S. Excess Money Growth and Inflation Relation in the Long-Run: A Nonlinear Analysis," MPRA Paper 23780, University Library of Munich, Germany.
    11. Helge Berger & Pär Österholm, 2011. "Does Money Growth Granger Cause Inflation in the Euro Area? Evidence from Out‐of‐Sample Forecasts Using Bayesian VARs," The Economic Record, The Economic Society of Australia, vol. 87(276), pages 45-60, March.
    12. Zongwu Cai & Bingyi Jing & Xinbing Kong & Zhi Liu, 2017. "Nonparametric regression with nearly integrated regressors under long‐run dependence," Econometrics Journal, Royal Economic Society, vol. 20(1), pages 118-138, February.
    13. Binner, J.M. & Tino, P. & Tepper, J. & Anderson, R. & Jones, B. & Kendall, G., 2010. "Does money matter in inflation forecasting?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(21), pages 4793-4808.
    14. Edvinsson, Rodney & Karlsson, Sune & Österholm, Pär, 2023. "Does Money Growth Predict Inflation? Evidence from Vector Autoregressions Using Four Centuries of Data," Working Papers 2023:3, Örebro University, School of Business.

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