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P-Star Model: A Leading Indicator of Inflation for Pakistan

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  • Abdul Qayyum

    (Pakistan Institute of Development Economics, Islamabad.)

  • Faiz Bilquees

    (Pakistan Institute of Development Economics, Islamabad.)

Abstract

The P-star inflation model is based on the long-term quantity theory of money and puts together the long-term determinants of the price level and the short-run changes in current inflation. The P-star model-based indicator has replaced the previous monetary policy procedures in a number of countries because it offers by far more information and predictive power than monitoring movements in money supply and the rate of monetary growth. In this paper we used the P-star model to calculate the leading indicator of inflation, and also to test the forecasting performance of the P-star model-based leading indicator of inflation. The results of the study show that compared to the simple autoregressive model and the M2 growth augmented model, the P-star model can be used to obtain the leading indicator of inflation in Pakistan because it has additional information about the future rate of inflation. Therefore, this paper provides a useful tool to the policy-makers to assess the future movement of inflation in Pakistan.

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Bibliographic Info

Article provided by Pakistan Institute of Development Economics in its journal The Pakistan Development Review.

Volume (Year): 44 (2005)
Issue (Month): 2 ()
Pages: 117-129

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Handle: RePEc:pid:journl:v:44:y:2005:i:2:p:117-129

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  1. Athanasios Orphanides & Richard Porter, 1998. "P* revisited: money-based inflation forecasts with a changing equilibrium velocity," Finance and Economics Discussion Series 1998-26, Board of Governors of the Federal Reserve System (U.S.).
  2. Lawrence J. Christiano, 1989. "P*: not the inflation forecaster's holy grail," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-18.
  3. Kenneth Kuttner, 1992. "Monetary policy with uncertain estimates of potential output," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jan, pages 2-15.
  4. Eduard J. Bomhoff, 1990. "Stability of Velocity in the Group of Seven Countries," IMF Working Papers 90/80, International Monetary Fund.
  5. Clemens J. M. Kool & John A. Tatom, 1994. "The P-star model in five small economies," Review, Federal Reserve Bank of St. Louis, issue May, pages 11-29.
  6. Michael P. Clements & David F. Hendry, 2001. "Forecasting Non-Stationary Economic Time Series," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262531895, December.
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Cited by:
  1. S. Adnan & H.A.S. BUKHARI & Safdar Ullah KHAN, 2008. "Does Volatility In Government Borrowing Leads To Higher Inflation? Evidence From Pakistan," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 3(3(5)_Fall), pages 187-202.
  2. Qayyum, Abdul, 2006. "Money, Inflation, and Growth in Pakistan," MPRA Paper 2055, University Library of Munich, Germany, revised 2006.

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