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Money growth and inflation: a regime switching approach

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  • Amisano, Gianni
  • Fagan, Gabriel

Abstract

We develop a time-varying transition probabilities Markov Switching model in which inflation is characterised by two regimes (high and low inflation). Using Bayesian techniques, we apply the model to the euro area, Germany, the US, the UK and Canada for data from the 1960s up to the present. Our estimates suggest that a smoothed measure of broad money growth, corrected for real-time estimates of trend velocity and potential output growth, has important leading indicator properties for switches between inflation regimes. Thus money growth provides an important early warning indicator for risks to price stability. JEL Classification: C11, C53, E31

Suggested Citation

  • Amisano, Gianni & Fagan, Gabriel, 2010. "Money growth and inflation: a regime switching approach," Working Paper Series 1207, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20101207
    Note: 337895
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    References listed on IDEAS

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    More about this item

    Keywords

    Bayesian inference; early warning; inflation regimes; markov switching model; money growth; time varying transition probabilities;
    All these keywords.

    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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