Money Growth and Inflation: Implications of Reducing the Bias of VAR Estimates

A bivariate second-order VAR model of money growth and inflation is specified and estimatedby means of least squares. The bias of the parameter estimates is approximated in three ways and new, bias-reduced estimates are computed using the approximations. The effects of bias reduction on impulse-response functions and variance decompositions are found to be negligible. The effects of bias reduction on predictions, in particular on predicted inflation, are more substantial.