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Does money growth predict inflation in Sweden? Evidence from vector autoregressions using four centuries of data

Author

Listed:
  • Rodney Edvinsson

    (Stockholm University)

  • Sune Karlsson

    (Örebro University)

  • Pär Österholm

    (Fleminggatan 7)

Abstract

In this paper, we add new evidence to a long-debated macroeconomic question, namely, whether money growth has predictive power for inflation or put differently, whether money growth Granger causes inflation. We use a historical dataset—consisting of annual Swedish data on money growth and inflation ranging from 1620 to 2021—and employ state-of-the-art Bayesian estimation methods. Specifically, we employ VAR models with drifting parameters and stochastic volatility which are used to conduct analysis both within- and out-of-sample. Our results indicate that the within-sample analysis—based on marginal likelihoods—provides strong evidence in favour of money growth Granger causing inflation. This strong evidence is, however, not reflected in our out-of-sample analysis, as it does not translate into a corresponding improvement in forecast accuracy.

Suggested Citation

  • Rodney Edvinsson & Sune Karlsson & Pär Österholm, 2025. "Does money growth predict inflation in Sweden? Evidence from vector autoregressions using four centuries of data," Empirical Economics, Springer, vol. 68(4), pages 1613-1635, April.
    • Handle: RePEc:spr:empeco:v:68:y:2025:i:4:d:10.1007_s00181-024-02684-y
    DOI: 10.1007/s00181-024-02684-y
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    Keywords

    Time-varying parameters; Stochastic volatility; Out-of-sample forecasts;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • N13 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: Pre-1913

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