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The money-inflation nexus revisited

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  • Ringwald, Leopold
  • Zörner, Thomas O.

Abstract

we propose a Bayesian Logistic Smooth Transition Autoregressive (LSTAR) model with stochastic volatility (SV) to model inflation dynamics in a nonlinear fashion. Inflationary regimes are determined by smoothed money growth which serves as a transition variable that governs the transition between regimes. We apply this approach to quarterly data from the US, the UK and Canada and are able to identify well-known, high inflation periods in the samples. Moreover, our results suggest that the role of money growth is specific to the economy under scrutiny and it can help to improve forecasting accuracy. Finally, we analyze a variety of different model specifications and are able to confirm that adjusted money growth still has leading indicator properties on inflation regimes.

Suggested Citation

  • Ringwald, Leopold & Zörner, Thomas O., 2023. "The money-inflation nexus revisited," Journal of Empirical Finance, Elsevier, vol. 73(C), pages 293-333.
    • Handle: RePEc:eee:empfin:v:73:y:2023:i:c:p:293-333
    DOI: 10.1016/j.jempfin.2023.07.002
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    More about this item

    Keywords

    Money-inflation link; Nonlinear modeling; Bayesian inference; LSTAR-SV model;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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