Does Money Growth Predict Inflation? Evidence from Vector Autoregressions Using Four Centuries of Data

Rodney Edvinsson (), Sune Karlsson () and Pär Österholm ()
Additional contact information
Rodney Edvinsson: Stockholm University, Postal: Department of Economic History, Stockholm University, 106 91 Stockholm, Sweden, https://www.su.se/english/profiles/redvi-1.183340
Pär Österholm: Örebro University School of Business, Postal: Örebro University, School of Business, SE - 701 82 ÖREBRO, Sweden, https://www.oru.se/english/employee/par_osterholm

No 2023:3, Working Papers from Örebro University, School of Business

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.

Keywords: Time-varying parameters; Stochastic volatility; Out-of-sample forecasts (search for similar items in EconPapers)
JEL-codes: E31 E37 E47 E51 N13 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2023-02-28
New Economics Papers: this item is included in nep-fdg, nep-his, nep-mon and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:oruesi:2023_003

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