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Does the P* Model Provide Any Rationale for Monetary Targeting?

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  • Svensson, Lars E O

Abstract

The so-called P* model is frequently used or referred to in discussions of monetary targeting. This gives the impression that the P* model might provide some rationale for monetary targeting or for the monetary reference value used by the Eurosystem. The P* model implies that inflation is determined by the level of and changes in the "real money gap" (the deviation of current real balances from their long-run equilibrium level), and hence that the real money gap is an important indicator for future inflation. Nevertheless, the P* model does not seem to provide any rationale for either a Bundesbank-style money-growth target or a Eurosystem-style money-growth indicator.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2198.

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Date of creation: Aug 1999
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Handle: RePEc:cpr:ceprdp:2198

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Keywords: Inflation Targeting; Real Balances; Reference Value;

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  1. Lars E.O. Svensson, 1999. "Monetary Policy Issues for the Eurosystem," NBER Working Papers 7177, National Bureau of Economic Research, Inc.
  2. Svensson, L.E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Papers 646, Stockholm - International Economic Studies.
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