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

Author

Listed:
  • 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.

Suggested Citation

  • Gianni Amisano & Roberta Colavecchio, 2013. "Money Growth and Inflation: evidence from a Markov Switching Bayesian VAR," Macroeconomics and Finance Series 201304, University of Hamburg, Department of Socioeconomics.
    • Handle: RePEc:hep:macppr:201304
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    File URL: https://www.wiso.uni-hamburg.de/repec/hepdoc/macppr_4_2013.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Eltejaei , Ebrahim & Montazeri Shoorekchali , Jalal, 2021. "Investigating the Relationship between Money Growth and Inflation in Turkey: A Nonlinear Causality Approach," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 16(3), pages 305-322, September.
    2. Markku Lanne & Jani Luoto & Henri Nyberg, 2014. "Is the Quantity Theory of Money Useful in Forecasting U.S. Inflation?," CREATES Research Papers 2014-26, Department of Economics and Business Economics, Aarhus University.
    3. Colavecchio, Roberta & Amisano, Gianni & Fagan, Gabriel, 2014. "A money-based indicator for deflation risk," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100595, Verein für Socialpolitik / German Economic Association.
    4. Claudio Borio & Marco Jacopo Lombardi & James Yetman & Egon Zakrajsek, 2023. "The two-regime view of inflation," BIS Papers, Bank for International Settlements, number 133.
    5. Cuneyt Dumrul & Yasemin Dumrul, 2015. "Price-Money Relationship after Infl ation Targeting: Co-integration Test with Structural Breaks for Turkey and Brazil," International Journal of Economics and Financial Issues, Econjournals, vol. 5(3), pages 701-708.

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    More about this item

    Keywords

    Money growth; infl?ation regimes; Markov Switching model; Bayesian inference;
    All these keywords.

    JEL classification:

    • 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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