The usefulness of P* measures for Japan and Germany
AbstractThis paper develops measures of long-run equilibrium price levels (P*) for Japan and Germany following the approach used for the United States by Hallman, Porter, and Small . Under this approach, P* is detemined by potential output, equilibrium velocity, and the amount of money in the economy. Constructing P* for these foreign countries is more complicated than in the U.S. case because the velocities of the broad monetary aggregates (M2+CDs in Japan and M3 in Germany) exhibit clear downward trends in contrast to the relatively flat trend of U.S. M2 velocity. We utilize dynamic specifications of money demand to construct measures of equilibrium velocity and P for Japan and Germany. We then assess the explanatory power of deviations of actual prices from P* in predicting the amount of inflationary potential in the Japanese and German economies. In general, we find that the P* approach is useful in the analysis of German inflation, but that it is less promising for Japan than it has been for the United States.
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Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 414.
Date of creation: 1991
Date of revision:
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- repec:onb:oenbwp:y::i:20:b:1 is not listed on IDEAS
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