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P -Star, Exchange Rate Regime and Inflation Determination: The Malaysian case

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  • Michael Meow-Chung Yap

Abstract

Introduced in 1989, the P -star model draws on the quantity theory of money. Money plays a central role in determining the long-termprice level. The model has been applied to various industrialized countries. Its advantage is in providing a consistent framework for analysing short-term monetary policy setting against the prospects of achieving a longer-term price stability objective. Hence its adoption greatly assists policy-makers in overcoming the 'time-inconsistency' problem by taking a forward-looking approach to policy. This article analyses the relevance of the P -star model to the Malaysian experience. An extension to the original P -star model, following a generalized monetary approach to the balance of payments and which allows the evaluation of the exchange rate regime's influence on inflation, is also tested. It is found that the original P -star model fits the Malaysian case well although the extended model cannot be rejected. The results strongly support the view that inflation in Malaysia is largely determined by domestic disequilibria although the role of the exchange rate regime cannot be ignored. The analysis provides firm support for using the monetary aggregates in a central role in conducting monetary policy. It strongly advocates the P -star approach as a guidepost to monetary policy.

Suggested Citation

  • Michael Meow-Chung Yap, 2002. "P -Star, Exchange Rate Regime and Inflation Determination: The Malaysian case," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 7(3), pages 379-407.
    • Handle: RePEc:taf:rjapxx:v:7:y:2002:i:3:p:379-407
    DOI: 10.1080/1354786022000007898
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    References listed on IDEAS

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    1. Peter Hoeller & Pierre Poret, 1991. "P-Star as an Indicator of Inflationary Pressure," OECD Economics Department Working Papers 101, OECD Publishing.
    2. Ms. Alicia García-Herrero & Manoj Vasant Pradhan, 1999. "The Domestic and Foreign Price Gaps in the P-STAR Model: Evidence from Spain," IMF Working Papers 1998/064, International Monetary Fund.
    3. Jeffrey J. Hallman & Richard D. Porter & David H. Small, 1989. "M2 per unit of potential GNP as an anchor for the price level," Staff Studies 157, Board of Governors of the Federal Reserve System (U.S.).
    4. Jeffrey A. Frankel & Shang-Jin Wei, 1994. "Yen Bloc or Dollar Bloc? Exchange Rate Policies of the East Asian Economies," NBER Chapters, in: Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows, pages 295-333, National Bureau of Economic Research, Inc.
    5. Jørgen Elmeskov, 1993. "High and Persistent Unemployment: Assessment of the Problem and Its Causes," OECD Economics Department Working Papers 132, OECD Publishing.
    6. Claude Giorno & Pete Richardson & Deborah Roseveare & Paul van den Noord, 1995. "Estimating Potential Output, Output Gaps and Structural Budget Balances," OECD Economics Department Working Papers 152, OECD Publishing.
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    Cited by:

    1. Mansor Ibrahim, 2010. "Money-price relation in Malaysia: has it disappeared or strengthened?," Economic Change and Restructuring, Springer, vol. 43(4), pages 303-322, November.
    2. Liu, Tie-Ying & Lee, Chien-Chiang, 2021. "Global convergence of inflation rates," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    3. Mansor H. Ibrahim, 2009. "A Rolling Regression Analysis of International Transmission of Inflation in Malaysia," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 3(1), pages 21-39, February.

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