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Inflation transmission diagnostics via a Bayesian Graph Vector Autoregressive Model with Markov Switching
Fu, Jiali Cai, Fengjing Wu, Jinran Zhao, Shangrui Wang, You-Gan
Fu, Jiali
Cai, Fengjing
Wu, Jinran
Zhao, Shangrui
Wang, You-Gan
Abstract
The transmission of inflation is a widespread occurrence, and managing inflationary pressures is a crucial macroeconomic challenge. Although inflation is a typical macroeconomic variable, its contemporaneous and lagged causal relationships have not been thoroughly investigated, which could result in missing important policy insights. The Bayesian graph vector autoregression (BGVAR) model can identify contemporaneous and lagged causal relationships among economic variables, but it lacks practical research on inflationary inflation. To account for the structural transformation in the inflation transmission process, the authors propose a Bayesian graph vector autoregressive model with Markov switching (MS-BGVAR), which considers both regime switching and contemporaneous causality among macroeconomic variables. The proposed study focuses on analyzing the dynamics of inflation transmission relationships among G7 countries under different regimes, as these countries represent developed nations. The authors use inflation data from 1971–2019, which shows two distinct inflation regimes within the sample period. The authors conduct simulation experiments to generate moderately dimensional simulated data for both regimes and indicators, demonstrating the theoretical reliability of the proposed model in accurately identifying graph structures. Finally, the authors apply the proposed model to identify structural breaks and causal transmission relationships in the inflation transmission process of G7 economies, demonstrating that the proposed model has significant economic significance and good explanatory power in the selected target countries.
Keywords
contemporaneous causality, G7, inflation transmission, Markov switching
Date
2024
Type
Journal article
Journal
Journal of Systems Science and Complexity
Book
Volume
Issue
Page Range
1-24
Article Number
ACU Department
Institute for Positive Psychology and Education
Faculty of Education and Arts
Institute for Learning Sciences and Teacher Education (ILSTE)
Faculty of Education and Arts
Institute for Learning Sciences and Teacher Education (ILSTE)
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Source URL
Event URL
Open Access Status
License
All rights reserved
File Access
Controlled