Money and Inflation: The Role of Persistent Velocity Movements

Arbeitspapier

While the long run relation between money and inflation is well established, empirical evidence on the adjustment to the long run equilibrium is very heterogeneous. In the present paper we use a multivariate state space framework, that substantially expands the traditional vector error correction approach, to analyze the short run impact of money on prices. We contribute to the literature in three ways: First, we distinguish changes in velocity of money that are due to institutional developments and thus do not induce inflationary pressure, and changes that reflect transitory movements in money demand. This is achieved with a newly developed multivariate unobserved components decomposition. Second, we analyze whether the high volatility of the transmission from monetary pressure to inflation follows some structure, i.e., if the parameter regime can assumed to be constant. Finally, we use our model to illustrate the consequences of the monetary policy of the Fed that has been employed to mitigate the impact of the financial crisis, simulating different exit strategy scenarios.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IWH Discussion Papers ; No. 2/2010

Classification and Topics

• Classification: Wirtschaft ; Price Level; Inflation; Deflation ; Monetary Policy ; Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
• Subject: multivariate state space model ; inflation ; money ; Umlaufsgeschwindigkeit ; multivariates Zustandsraummodell ; Inflation ; Geldmenge ; Geldumlaufgeschwindigkeit ; Zustandsraummodell ; Geldmenge ; Inflation ; Schätzung ; Geldpolitik ; Finanzmarktkrise ; Reaktionsfunktion ; USA

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): El-Shagi, Makram ; Giesen, Sebastian
• Event: Veröffentlichung
• (who): Leibniz-Institut für Wirtschaftsforschung Halle (IWH)
• (where): Halle (Saale)
• (when): 2010

Further information

• Handle: http://hdl.handle.net/10419/37068
• URN: urn:nbn:de:101:1-2010031934
• Last update: 10.03.2025, 11:44 AM CET