Money Growth and Infl‡ation: Evidence from a Markov Switching Bayesian VAR

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe contribute to the empirical debate on the role of money in monetary policy by analysing the features of the relationship between money growth and in ‡ation in a Bayesian Markov Switching framework for a set of four countries, the US, the UK, the Euro area and Japan, over an estimation period spanning from 1960 to 2012. We …nd that the relationship between money growth and in ‡ation appears to be nonlinear, as our estimation results identify multiple in ‡ation regimes displaying clear and diversi…ed features; moreover, as part of the model´s information set, money growth plays a determinant role in the allocation of regimes. We show that observing monetary developments does (slightly) improve the signal of entering a high in ‡ation regime but the in ‡uence of money on such signal seems to be relevant mainly in the 70s and the early 80s, i.e. in periods featuring exceptionally high rates of in ‡ation. Our evidence con…rms that the relationship between money and in ‡ation appears to be relatively weak during periods featuring low and stable in ‡ation.

Money Growth and Inflation: New Evidence from a Nonlinear and Asymmetric Analysis

“…Similar evidence is documented by Canova and Menz () for Japan. Amisano and Colavecchio () investigate the nonlinearity in the pass‐through from money supply to inflation in a Bayesian Markov Switching framework for the U.S., the U.K., the Euro area and Japan over 1960–2012. They find evidence of a nonlinear relation between money growth and inflation.…”

“…Reasons for this are attributed to the loss of confidence during an economic downturn and downward price (Morgan, ). Evidence has shown that the adjustment of the price level to various macroeconomic variables, including inflation (Amisano and Colavecchioz, ), the exchange rate (Gervais and Khraief, ), changes in costs of firms (Peltzman, ; Taylor, ) is asymmetric. Prices may be rigid due to a number of factors which include: price leadership (Stigler, ); imperfect information (Stiglitz, ); imperfect competition (Kopecky and Van Hoose, ); menu costs (Barro, ); transaction costs (Obstfeld and Taylor, ); differences in financial structure (Cecchetti, ); different monetary regimes (Amisano and Colavecchio, ); central bank intervention (Mark and Moh, ); the downward rigidity of prices (Morgan, ; Rhee and Rich, ; Karras and Stokes, ); a liquidity trap situation (Krugman et al, ); health of a country’s financial system (De Long and Summers, ; Cecchetti, ); and changes in business and consumer confidence over the business cycle (Morgan, ).…”

“…Despite the fact that a large number of studies have investigated the relation between money supply and inflation (Friedman, ; Friedman and Swartz, ; King, ; Benati, among others), surprisingly there is only a limited, mainly older literature, which investigates the asymmetry in pass‐through from money growth to inflation (Bell and Mankiw, ; Crowder, ; Weise, ; Karras and Stokes, ; Senda, ; Haug and Dewald, , Amisano and Colavecchioz, ). Accordingly, the purpose of this study is to investigate the magnitude of money growth pass‐through to the rate of inflation, and whether this pass‐through is asymmetric.…”

A Money-Based Indicator for Deflation Risk

“…Amisano and Colavecchio (2013) estimate a Markov Switching vector autoregressive model for Japan and found evidence of three di¤erent regimes of in ‡ation, one of which displaying features and the time allocation consistent with the empirical evidence of Japanese de ‡ationary episodes.…”

“…In the analysis we carry out here we calibrate the euro area Low in ‡ation state with parameter values that qualitatively correspond to the state-speci…c features of the parameters estimated for Japan in Amisano and Colavecchio (2013). 3 The same argument applies to the US case.…”