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A money-based indicator for deflation risk

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  • Colavecchio, Roberta
  • Amisano, Gianni
  • Fagan, Gabriel

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 mid 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 estimation sample; moreover, money growth plays a significant role in the assessment of such risks. Evidence for Japan and the US shows that for both countries the inclusion of an indicator variable does not substantially change the assessment of the risk of a "Low" inflation regime.

Suggested Citation

  • 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.
    • Handle: RePEc:zbw:vfsc14:100595
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    References listed on IDEAS

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    1. Günter Coenen & Anders Warne, 2014. "Risks to Price Stability, the Zero Lower Bound, and Forward Guidance: A Real-Time Assessment," International Journal of Central Banking, International Journal of Central Banking, vol. 10(2), pages 7-54, June.
    2. Benhabib, Jess & Schmitt-Grohe, Stephanie & Uribe, Martin, 2001. "The Perils of Taylor Rules," Journal of Economic Theory, Elsevier, vol. 96(1-2), pages 40-69, January.
    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. Lawrence J. Christiano & Massimo Rostagno, 2001. "Money Growth Monitoring and the Taylor Rule," NBER Working Papers 8539, National Bureau of Economic Research, Inc.
    5. 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.
    6. Jörg Decressin & Douglas Laxton, 2009. "Gauging Risks for Deflation," IMF Staff Position Notes 2009/01, International Monetary Fund.
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    Cited by:

    1. Gerdesmeier, Dieter & Reimers, Hans-Eggert & Roffia, Barbara, 2015. "Consumer and asset prices: Some recent evidence," Wismar Discussion Papers 01/2015, Hochschule Wismar, Wismar Business School.

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    More about this item

    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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