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Does Money Matter for U.S. Inflation? Evidence from Bayesian VARs

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  • Pär Österholm
  • Helge Berger

Abstract

We use Bayesian estimation techniques to investigate whether money growth Granger-causes inflation in the United States. We test for Granger-causality out-of-sample and find, perhaps surprisingly given recent theoretical arguments, that including money growth in simple VAR models of inflation does systematically improve out-of-sample forecasting accuracy. This holds for a long forecasting sample 1960-2005, as well for more recent subperiods, including the Volcker and Greenspan eras. However, the contribution of money to inflation forecasting accuracy is quantitatively limited and tends to be smaller in recent subperiods, in particular in models that also include information on real GDP growth and interest rates.

Suggested Citation

  • Pär Österholm & Helge Berger, 2008. "Does Money Matter for U.S. Inflation? Evidence from Bayesian VARs," IMF Working Papers 08/76, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:08/76
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    Cited by:

    1. Emil Stavrev & Helge Berger, 2012. "The information content of money in forecasting euro area inflation," Applied Economics, Taylor & Francis Journals, vol. 44(31), pages 4055-4072, November.
    2. Oliver Hossfeld, 2010. "US Money Demand, Monetary Overhang, and Inflation," Working Papers 2010.4, International Network for Economic Research - INFER.

    More about this item

    Keywords

    Forecasting models; Inflation; Monetary policy; Monetary aggregates; United States; Out-of-Sample Forecasting; Granger Causality; Volcker; Greenspan; money growth; monetary economics;

    JEL classification:

    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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