A money-based indicator for deflation risk
AbstractWe 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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Bibliographic InfoPaper provided by Hamburg University, Department Wirtschaft und Politik in its series Macroeconomics and Finance Series with number 201403.
Length: 38 pages
Date of creation: Apr 2014
Date of revision:
Money growth; deflation; inflation regimes; Markov Switching models; Bayesian inference;
Find related papers by 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-04-18 (All new papers)
- NEP-EEC-2014-04-18 (European Economics)
- NEP-MAC-2014-04-18 (Macroeconomics)
- NEP-MON-2014-04-18 (Monetary Economics)
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