Money growth and inflation: A regime switching approach

Gianni Amisano and Gabriel Fagan ()

Journal of International Money and Finance, 2013, vol. 33, issue C, 118-145

Abstract: We develop a Markov Switching model for inflation with time-varying transition probabilities. Inflation is characterized by two regimes (high and low inflation) and the probability of regime changes depends on money growth. Using Bayesian techniques, we apply the model to the euro area, Germany, the US, the UK and Canada for data from the 1960s up to the present. Our estimates suggest that a smoothed measure of broad money growth, corrected for real-time estimates of trend velocity and potential output growth, has important leading indicator properties for switches between inflation regimes. Thus money growth provides an important early warning indicator for risks to price stability.

Keywords: Money growth; Inflation regimes; Early warning; Time varying transition probabilities; Markov Switching model; Bayesian inference (search for similar items in EconPapers)
JEL-codes: C11 C53 E31 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (48)

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Working Paper: Money growth and inflation: a regime switching approach (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:33:y:2013:i:c:p:118-145

DOI: 10.1016/j.jimonfin.2012.09.006

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