Money growth and inflation: a regime switching approach
AbstractWe develop a time-varying transition probabilities Markov Switching model in which inflation is characterised by two regimes (high and low inflation). 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. JEL Classification: C11, C53, E31
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Date of creation: Jun 2010
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Other versions of this item:
- Amisano, Gianni & Fagan, Gabriel, 2013. "Money growth and inflation: A regime switching approach," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 118-145.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-06-18 (All new papers)
- NEP-CBA-2010-06-18 (Central Banking)
- NEP-ECM-2010-06-18 (Econometrics)
- NEP-EEC-2010-06-18 (European Economics)
- NEP-MAC-2010-06-18 (Macroeconomics)
- NEP-MON-2010-06-18 (Monetary Economics)
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