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A money-based indicator for deflation risk

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Author Info

  • Gianni Amisano

    ()
    (European Central Bank, DG Research)

  • Roberta Colavecchio

    ()
    (Universität Hamburg (University of Hamburg))

  • Gabriel Fagan

    ()
    (European Central Bank, DG Research)

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    Abstract

    We employ a money-based early warning model in order to analyse the risk of a low inflation regime in the euro area, Japan and the US. The model specification allows for three different inflation regimes: Low, Medium and High inflation, while state transition probabilities vary over time as a function of monetary variables. Using Bayesian techniques, we estimate the model with data from the early 1970s up to the present. Our analysis suggests that the risks of a Low inflation regime in the euro area have been increasing in the course of the last six quarters of the sample; moreover, money growth appears to play a significant role in the assessment of such risks. Evidence for Japan and the US, on the other hand, shows that the inclusion of a monetary indicator variable does not substantially change the assessment of the risk of a Low inflation regime in either of the two countries.

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    File URL: http://www.wiso.uni-hamburg.de/repec/hepdoc/macppr_3_2014.pdf
    File Function: First version, 2014
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    Bibliographic Info

    Paper provided by Hamburg University, Department Wirtschaft und Politik in its series Macroeconomics and Finance Series with number 201403.

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    Length: 38 pages
    Date of creation: Apr 2014
    Date of revision:
    Handle: RePEc:hep:macppr:201403

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

    Keywords: Money growth; deflation; inflation regimes; Markov Switching models; Bayesian inference;

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    1. Lawrence J. Christiano & Massimo Rostagno, 2001. "Money Growth Monitoring and the Taylor Rule," NBER Working Papers 8539, National Bureau of Economic Research, Inc.
    2. Benhabib, Jess & Schmitt-Grohé, Stephanie & Uribe, Martín, 1999. "The Perils of Taylor Rules," CEPR Discussion Papers 2314, C.E.P.R. Discussion Papers.
    3. 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.
    4. Jörg Decressin & Douglas Laxton, 2009. "Gauging Risks for Deflation," IMF Staff Position Notes 2009/01, International Monetary Fund.
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