Does money growth predict inflation in Sweden? Evidence from vector autoregressions using four centuries of data

Rodney Edvinsson (), Sune Karlsson () and Pär Österholm
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Rodney Edvinsson: Stockholm University
Sune Karlsson: Örebro University

Empirical Economics, 2025, vol. 68, issue 4, No 4, 1613-1635

Abstract: 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)
Date: 2025
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DOI: 10.1007/s00181-024-02684-y

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