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Money Growth and Inflation: evidence from a Markov Switching Bayesian VAR

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Author Info

  • Gianni Amisano

    ()
    (DG Research, European Central Bank and University of Brescia, Italy)

  • Roberta Colavecchio

    ()
    (Universitaet Hamburg (University of Hamburg))

Abstract

We contribute to the empirical debate on the role of money in monetary policy by analysing the features of the relationship between money growth and inflation in a Bayesian Markov Switching framework for a set of four countries, the US, the UK, the Euro area and Japan, over an estimation period spanning from 1960 to 2012. We find that the relationship between money growth and inflation appears to be nonlinear, as our estimation results identify multiple inflation regimes displaying clear and diversified features; moreover, as part of the model's information set, money growth plays a determinant role in the allocation of regimes. We show that observing monetary developments does (slightly) improve the signal of entering a high inflation regime but the influence of money on such signal seems to be relevant mainly in the 70s and the early 80s, i.e. in periods featuring exceptionally high rates of inflation. Our evidence confi?rms that the relationship between money and inflation appears to be relatively weak during periods featuring low and stable inflation.

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File URL: http://www.wiso.uni-hamburg.de/repec/hepdoc/macppr_4_2013.pdf
File Function: First version, 2013
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Bibliographic Info

Paper provided by Hamburg University, Department Wirtschaft und Politik in its series Macroeconomics and Finance Series with number 201304.

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Length: 23 pages
Date of creation: May 2013
Date of revision:
Handle: RePEc:hep:macppr:201304

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Web page: http://www.wiso.uni-hamburg.de/dwp
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Related research

Keywords: Money growth; infl?ation regimes; Markov Switching model; Bayesian inference;

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  1. Berger, Helge & Stavrev, Emil, 2008. "The information content of money in forecasting Euro area inflation," Discussion Papers 2008/15, Free University Berlin, School of Business & Economics.
  2. Teles, Pedro & Uhlig, Harald, 2010. "Is Quantity Theory Still Alive?," CEPR Discussion Papers 8049, C.E.P.R. Discussion Papers.
  3. Andreas Beyer & Jurgen A. Doornik & David F. Hendry, 2000. "Reconstructing Aggregate Euro-zone Data," Journal of Common Market Studies, Wiley Blackwell, vol. 38(4), pages 613-624, November.
  4. John Geweke & Gianni Amisano, 2007. "Hierarchical Markov Normal Mixture Models with Applications to Financial Asset Returns," Working Papers 0705, University of Brescia, Department of Economics.
  5. D'Agostino, Antonello & Surico, Paolo, 2007. "Does global liquidity help to forecast US inflation?," Research Technical Papers 10/RT/07, Central Bank of Ireland.
  6. Sylvia Kaufmann & Peter Kugler, 2005. "Does Money Matter for Inflation in the Euro Area?," Working papers 2005/09, Faculty of Business and Economics - University of Basel.
  7. Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262112388, January.
  8. Lucas, Robert E, Jr, 1980. "Two Illustrations of the Quantity Theory of Money," American Economic Review, American Economic Association, vol. 70(5), pages 1005-14, December.
  9. De Santis, Roberto A., 2012. "Quantity theory is alive: the role of international portfolio shifts," Working Paper Series 1435, European Central Bank.
  10. Gianni Amisano & Raffaella Giacomini, 2005. "Comparing Density Forecsts via Weighted Likelihood Ratio Tests," Working Papers ubs0504, University of Brescia, Department of Economics.
  11. Ralf Brüggemann & Helmut Lütkepohl & Massimiliano Marcellino, 2008. "Forecasting euro area variables with German pre-EMU data," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 27(6), pages 465-481.
  12. Thomas J. Sargent & Paolo Surico, 2011. "Two Illustrations of the Quantity Theory of Money: Breakdowns and Revivals," American Economic Review, American Economic Association, vol. 101(1), pages 109-28, February.
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