A Markov-Switching Model of Inflation in Bolivia

Abstract

The Bolivian inflation process is analyzed utilizing a time-varying univariate and multivariate Markov-switching model (TMS). With monthly data and, beginning in the late 1930s, inflation is accurately described by a univariate TMS. The intercept for the high-inflation regime is significantly higher than for the low-inflation regime and the actual inflation rate mirrors the smoothing probabilities of the Markov process. Additionally, the predicted duration of each regime closely fits the periods when the country experienced low and inordinate high inflation rates. From a long-run perspective and utilizing a multivariate TMS, the results generally fall in line with what the quantity theory of money predicts. In the high-inflation regime, money growth increases inflation (almost) one-for-one, as classical economics contends. From a short-run perspective and in the high-inflation regime, inflation is almost exclusively explained by a negative output gap. In the low-inflation regime, lagged inflation is the most important determinant of inflation, in line with price stickiness expectations. Partitioning the sources of inflation demonstrate that, from a long-run perspective and in the high inflation regime, differences in inflation are mostly explained by GDP growth; in the low-inflation regime, money growth and velocity growth are the principal factors explaining the variance of inflation. From a short-run perspective, the output gap explains almost all regression variance in the high-inflation regime, and past inflation does the same during times of low inflation, though in both cases the R2 is low which precludes making definite statements about the sources of variability in inflation.

Predicting Inflation—A Holistic Approach

“…The most recent literature on the quantity equation and inflation uses Markov switching models to describe inflation. Bojanic (2021) analyzed the Bolivian inflation process by utilizing a time-varying univariate and multivariate Markov switching model, and found that the results generally fall in line with what the quantity theory of money predicts. He further found that by partitioning the sources of inflation, he can demonstrate that, from a long-term perspective and in a high-inflation regime, differences in inflation are mostly explained by GDP growth.…”

Predicting Inflation—A Holistic Approach

“…The most recent literature on the quantity equation and inflation uses Markov switching models to describe inflation. Bojanic (2021) analyzed the Bolivian inflation process by utilizing a time-varying univariate and multivariate Markov switching model, and found that the results generally fall in line with what the quantity theory of money predicts. He further found that by partitioning the sources of inflation, he can demonstrate that, from a long-term perspective and in a high-inflation regime, differences in inflation are mostly explained by GDP growth.…”

Financial stability and monetary policy of the Central Bank of West African Countries: a Markov-Switching model

“…We estimated the short-term interest rate by including only the constant as the explanatory variable. The regimes are generally identified according to the estimated constant terms, the standard deviations or transition probabilities (Bojanic, 2021).…”

“…We estimated the short-term interest rate by including only the constant as the explanatory variable. The regimes are generally identified according to the estimated constant terms, the standard deviations or transition probabilities (Bojanic, 2021). Results of our estimations presented in Table 2 revealed that the constant term of regime 1 (0.041) is inferior to that of regime 2 (0.070).…”

Spillover Effects of Currency Interactions Across Economic Cycles: A Quantile-VAR Analysis

“…Moreover, ref. [14] used time-varying univariate and multivariate Markov-switching models to model inflation in Bolivia. Their research found that inflation rates during high and low inflation periods were closely related to the smooth probabilities of the Markov process.…”

Predicting Inflation—A Holistic Approach

“…The most recent literature on the quantity equation and inflation uses Markov switching models to describe inflation. Bojanic (2021) analyzed the Bolivian inflation process by utilizing a time-varying univariate and multivariate Markov switching model, and found that the results generally fall in line with what the quantity theory of money predicts. He further found that by partitioning the sources of inflation, he can demonstrate that, from a long-term perspective and in a high-inflation regime, differences in inflation are mostly explained by GDP growth.…”

Financial stability and monetary policy of the Central Bank of West African Countries: a Markov-Switching model

“…We estimated the short-term interest rate by including only the constant as the explanatory variable. The regimes are generally identified according to the estimated constant terms, the standard deviations or transition probabilities (Bojanic, 2021).…”

“…We estimated the short-term interest rate by including only the constant as the explanatory variable. The regimes are generally identified according to the estimated constant terms, the standard deviations or transition probabilities (Bojanic, 2021). Results of our estimations presented in Table 2 revealed that the constant term of regime 1 (0.041) is inferior to that of regime 2 (0.070).…”

Spillover Effects of Currency Interactions Across Economic Cycles: A Quantile-VAR Analysis

“…Moreover, ref. [14] used time-varying univariate and multivariate Markov-switching models to model inflation in Bolivia. Their research found that inflation rates during high and low inflation periods were closely related to the smooth probabilities of the Markov process.…”

Predicting Inflation—A Holistic Approach

“…The most recent literature on the quantity equation and inflation uses Markov switching models to describe inflation. Bojanic (2021) analyzed the Bolivian inflation process by utilizing a time-varying univariate and multivariate Markov switching model, and found that the results generally fall in line with what the quantity theory of money predicts. He further found that by partitioning the sources of inflation, he can demonstrate that, from a long-term perspective and in a high-inflation regime, differences in inflation are mostly explained by GDP growth.…”

Financial stability and monetary policy of the Central Bank of West African Countries: a Markov-Switching model

“…We estimated the short-term interest rate by including only the constant as the explanatory variable. The regimes are generally identified according to the estimated constant terms, the standard deviations or transition probabilities (Bojanic, 2021).…”

“…We estimated the short-term interest rate by including only the constant as the explanatory variable. The regimes are generally identified according to the estimated constant terms, the standard deviations or transition probabilities (Bojanic, 2021). Results of our estimations presented in Table 2 revealed that the constant term of regime 1 (0.041) is inferior to that of regime 2 (0.070).…”

Spillover Effects of Currency Interactions Across Economic Cycles: A Quantile-VAR Analysis

“…Moreover, ref. [14] used time-varying univariate and multivariate Markov-switching models to model inflation in Bolivia. Their research found that inflation rates during high and low inflation periods were closely related to the smooth probabilities of the Markov process.…”