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The P-star approach to the link between money and prices

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  • John A. Tatom

Abstract

This paper examines several specification errors in the M2-based P* model and develops an M1-based estimate of this model. The apparent statistical significance of M2 is shown to arise from a spurious regression that uses a non-stationary regressor and because the significance test for M2 is biased by including the influence of a lagged dependent variable whose coefficient is not normally distributed. When these problems are addressed, M2 is not statistically significant related to the price level. The M1-based P* model exhibits a significant relationship between M1 and the price level, however.

Suggested Citation

  • John A. Tatom, 1990. "The P-star approach to the link between money and prices," Working Papers 1990-008, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:1990-008
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    References listed on IDEAS

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    Cited by:

    1. Frait, J. & Komarek, L. & Kulhanek, L., 2000. "P-Star-Model Based Analysis of Inflation Dynamic in the Czech Republic," The Warwick Economics Research Paper Series (TWERPS) 565, University of Warwick, Department of Economics.
    2. repec:kap:iaecre:v:14:y:2008:i:2:p:191-204 is not listed on IDEAS
    3. Aurelijus Dabušinskas, 2005. "Money and Prices in Estonia," Bank of Estonia Working Papers 2005-07, Bank of Estonia, revised 10 Nov 2005.
    4. Karl-Heinz Tödter & Hans-Eggert Reimers, 1994. "P-Star as a link between money and prices in Germany," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 130(2), pages 273-289, June.
    5. Joseph Atta-Mensah, 1996. "A Modified P*-Model of Inflation Based on M1," Staff Working Papers 96-15, Bank of Canada.
    6. Antonin Rusek, 2008. "Inflation Dynamics in New EU Member States: The Czech Case," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 14(2), pages 191-204, May.
    7. Mihalicova, Xenia & Gazda, Vladimír & Kubak, Matúš & Grof, Marek, 2011. "P-Star Model under the Currency Board – The Case of Bulgaria 1997-2008," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 83-91, September.

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