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Money growth and inflation: A regime switching approach

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  • Amisano, Gianni
  • Fagan, Gabriel

Abstract

We 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 Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 33 (2013)
Issue (Month): C ()
Pages: 118-145

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Handle: RePEc:eee:jimfin:v:33:y:2013:i:c:p:118-145

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Web page: http://www.elsevier.com/locate/inca/30443

Related research

Keywords: Money growth; Inflation regimes; Early warning; Time varying transition probabilities; Markov Switching model; Bayesian inference;

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References

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Citations

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Cited by:
  1. Dreger, Christian & Wolters, Jürgen, 2014. "Money demand and the role of monetary indicators in forecasting euro area inflation," International Journal of Forecasting, Elsevier, vol. 30(2), pages 303-312.
  2. Luca Sessa, 2012. "Economic (in)stability under monetary targeting," Temi di discussione (Economic working papers) 858, Bank of Italy, Economic Research and International Relations Area.
  3. Kaufmann Sylvia, 2011. "K-state switching models with endogenous transition distributions," Working Papers 2011-13, Swiss National Bank.
  4. Cruz, Christopher John & Mapa, Dennis, 2013. "An Early Warning System for Inflation in the Philippines Using Markov-Switching and Logistic Regression Models," MPRA Paper 50078, University Library of Munich, Germany.
  5. Gianni Amisano & Roberta Colavecchio & Gabriel Fagan, 2014. "A money-based indicator for deflation risk," Macroeconomics and Finance Series 201403, Hamburg University, Department Wirtschaft und Politik.

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