Nonlinear Relationship Between Permanent and Transitory Components of Monetary Aggregates and the Economy

FRB of St. Louis Working Paper No. 2013-018A

32 Pages Posted: 24 May 2013

See all articles by Richard G. Anderson

Richard G. Anderson

Federal Reserve Bank of St. Louis - Research Division

Marcelle Chauvet

University of California Riverside

Barry E. Jones

SUNY at Binghamton - Department of Economics

Date Written: May 2013

Abstract

This paper uses several methods to study the interrelationship among Divisia monetary aggregates, prices, and income; allowing for non-stationary, non-linearities, asymmetries, and time-varying relationships among the series. We propose a multivariate regime switching unobserved components model to obtain transitory and permanent components for each series, allowing for potential recurrent and structural changes in their dynamics. Each component follows distinct two-state Markov processes representing low or high phases. Since the lead-lag relationship between the phases can vary over time, rather than preimposing a structure to their linkages, the proposed flexible framework enables us to study their specific lead-lag relationship over each one of their cycles and over each U.S. recession in the last 40 years.

The decomposition of the series into permanent and transitory components reveals striking results. First, we find a strong nonlinear association between the components of money and prices – all low phases of the transitory component of prices were preceded by tight transitory and permanent money phases. We also find that most recessions were preceded by tight money phases, (its cyclical and permanent components), and high transitory price phases, (with the exception of the 2001 and 2009-2010 recessions). In addition, all recessions were associated with a decrease in transitory and permanent income.

Keywords: prices, Divisia monetary aggregates, income, unobserved components, permanent component, transitory component, turning point analysis, Markov-switching

JEL Classification: E31, C22

Suggested Citation

Anderson, Richard G. and Chauvet, Marcelle and Jones, Barry E., Nonlinear Relationship Between Permanent and Transitory Components of Monetary Aggregates and the Economy (May 2013). FRB of St. Louis Working Paper No. 2013-018A. Available at SSRN: https://ssrn.com/abstract=2269417 or http://dx.doi.org/10.2139/ssrn.2269417

Richard G. Anderson (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States

Marcelle Chauvet

University of California Riverside ( email )

900 University Avenue
4136 Sproul Hall
Riverside, CA 92521
United States
(951) 827-1587 (Phone)

HOME PAGE: http://https://sites.google.com/site/marcellechauvet/

Barry E. Jones

SUNY at Binghamton - Department of Economics ( email )

Binghamton, NY 13902-6000
United States

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