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A money-based indicator for deflation risk

  • Gianni Amisano


    (European Central Bank, DG Research)

  • Roberta Colavecchio


    (Universität Hamburg (University of Hamburg))

  • Gabriel Fagan


    (European Central Bank, DG Research)

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 early 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 sample; moreover, money growth appears to play a significant role in the assessment of such risks. Evidence for Japan and the US, on the other hand, shows that the inclusion of a monetary indicator variable does not substantially change the assessment of the risk of a Low inflation regime in either of the two countries.

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Paper provided by Hamburg University, Department Wirtschaft und Politik in its series Macroeconomics and Finance Series with number 201403.

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Length: 38 pages
Date of creation: Apr 2014
Date of revision:
Handle: RePEc:hep:macppr:201403
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  1. 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.
  2. Taimur Baig & Jörg Decressin & Tarhan Feyzioglu & Manmohan S. Kumar & Chris Faulkner-MacDonagh, 2003. "Deflation: Determinants, Risks, and Policy Options," IMF Occasional Papers 221, International Monetary Fund.
  3. 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.
  4. Coenen, Günter & Warne, Anders, 2013. "Risks to price stability, the zero lower bound and forward guidance: a real-time assessment," Working Paper Series 1582, European Central Bank.
  5. Jörg Decressin & Douglas Laxton, 2009. "Gauging Risks for Deflation," IMF Staff Position Notes 2009/01, International Monetary Fund.
  6. Lawrence J. Christiano & Massimo Rostagno, 2001. "Money Growth Monitoring and the Taylor Rule," NBER Working Papers 8539, National Bureau of Economic Research, Inc.
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