Money growth and inflation: A regime switching approach
AbstractWe develop a Markov Switching model for inflation with time-varying transition probabilities. Inflation is characterized by two regimes (high and low inflation) and the probability of regime changes depends on money growth. Using Bayesian techniques, we apply the model to the euro area, Germany, the US, the UK and Canada for data from the 1960s up to the present. Our estimates suggest that a smoothed measure of broad money growth, corrected for real-time estimates of trend velocity and potential output growth, has important leading indicator properties for switches between inflation regimes. Thus money growth provides an important early warning indicator for risks to price stability.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of International Money and Finance.
Volume (Year): 33 (2013)
Issue (Month): C ()
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Web page: http://www.elsevier.com/locate/inca/30443
Money growth; Inflation regimes; Early warning; Time varying transition probabilities; Markov Switching model; Bayesian inference;
Other versions of this item:
- Amisano, Gianni & Fagan, Gabriel, 2010. "Money growth and inflation: a regime switching approach," Working Paper Series 1207, European Central Bank.
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
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