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Money growth and inflation: a regime switching approach

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  • Amisano, Gianni
  • Fagan, Gabriel

Abstract

We 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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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1207.

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Date of creation: Jun 2010
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Handle: RePEc:ecb:ecbwps:20101207

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Keywords: Bayesian inference; early warning; inflation regimes; Markov Switching model; money growth; time varying transition probabilities;

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References

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Citations

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Cited by:
  1. 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.
  2. Christian Dreger & Jürgen Wolters, 2013. "Money demand and the role of monetary indicators in forecasting euro area inflation," FIW Working Paper series 119, FIW.
  3. 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.
  4. Kaufmann Sylvia, 2011. "K-state switching models with endogenous transition distributions," Working Papers 2011-13, Swiss National Bank.
  5. 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.

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