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Money Growth and Inflation: evidence from a Markov Switching Bayesian VAR

Author

Listed:
  • Gianni Amisano

    () (DG Research, European Central Bank and University of Brescia, Italy)

  • Roberta Colavecchio

    () (Universitaet Hamburg (University of Hamburg))

Abstract

We contribute to the empirical debate on the role of money in monetary policy by analysing the features of the relationship between money growth and inflation in a Bayesian Markov Switching framework for a set of four countries, the US, the UK, the Euro area and Japan, over an estimation period spanning from 1960 to 2012. We find that the relationship between money growth and inflation appears to be nonlinear, as our estimation results identify multiple inflation regimes displaying clear and diversified features; moreover, as part of the model's information set, money growth plays a determinant role in the allocation of regimes. We show that observing monetary developments does (slightly) improve the signal of entering a high inflation regime but the influence of money on such signal seems to be relevant mainly in the 70s and the early 80s, i.e. in periods featuring exceptionally high rates of inflation. Our evidence confi?rms that the relationship between money and inflation appears to be relatively weak during periods featuring low and stable inflation.

Suggested Citation

  • 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.
  • Handle: RePEc:hep:macppr:201304
    as

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    File URL: https://www.wiso.uni-hamburg.de/repec/hepdoc/macppr_4_2013.pdf
    File Function: First version, 2013
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    References listed on IDEAS

    as
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    3. John Geweke & Gianni Amisano, 2011. "Hierarchical Markov normal mixture models with applications to financial asset returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(1), pages 1-29, January/F.
    4. Pedro Teles & Harald Uhlig & João Valle e Azevedo, 2016. "Is Quantity Theory Still Alive?," Economic Journal, Royal Economic Society, vol. 126(591), pages 442-464, March.
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    More about this item

    Keywords

    Money growth; infl?ation regimes; Markov Switching model; Bayesian inference;

    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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