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Does Money Matter for U.S. Inflation? Evidence from Bayesian VARs

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  • Pär Österholm
  • Helge Berger

Abstract

We use Bayesian estimation techniques to investigate whether money growth Granger-causes inflation in the United States. We test for Granger-causality out-of-sample and find, perhaps surprisingly given recent theoretical arguments, that including money growth in simple VAR models of inflation does systematically improve out-of-sample forecasting accuracy. This holds for a long forecasting sample 1960-2005, as well for more recent subperiods, including the Volcker and Greenspan eras. However, the contribution of money to inflation forecasting accuracy is quantitatively limited and tends to be smaller in recent subperiods, in particular in models that also include information on real GDP growth and interest rates.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/76.

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Length: 17
Date of creation: 01 Mar 2008
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Handle: RePEc:imf:imfwpa:08/76

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Keywords: Monetary aggregates; Forecasting models; inflation; monetary policy; money growth; monetary economics; central bank; inflation forecasts; money demand; quantity theory; monetary fund; monetary phenomenon; monetary policy strategy; monetary indicators; aggregate demand; quantity theory of money; monetary models; forecasting inflation; monetary aggregate; moderate inflation; monetary model; monetary analysis; reduction in inflation; inflation dynamics; monetary theory; actual inflation; real money; monetary policy rules; theory of money; low inflation;

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Cited by:
  1. Emil Stavrev & Helge Berger, 2012. "The information content of money in forecasting euro area inflation," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 44(31), pages 4055-4072, November.

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