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The usefulness of P* measures for Japan and Germany

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  • Linda S. Kole
  • Michael P. Leahy

Abstract

This 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 [1991]. 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.

Suggested Citation

  • Linda S. Kole & Michael P. Leahy, 1991. "The usefulness of P* measures for Japan and Germany," International Finance Discussion Papers 414, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:414
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    References listed on IDEAS

    as
    1. Hallman, Jeffrey J & Porter, Richard D & Small, David H, 1991. "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?," American Economic Review, American Economic Association, vol. 81(4), pages 841-858, September.
    2. International Monetary Fund, 1989. "Wealth. Financial Liberalization, and the Demand for Money in Japan," IMF Working Papers 1989/085, International Monetary Fund.
    3. Kazuo Ueda, 1990. "Financial deregulation and the demand for money in Japan," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 176-205.
    4. 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.).
    5. International Monetary Fund, 1990. "Long-Run Money Demand in Large Industrial Countries," IMF Working Papers 1990/053, International Monetary Fund.
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    Citations

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    Cited by:

    1. Bruce Kasman, 1993. "A comparison of monetary policy operating procedures in six industrial countries," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
    2. Ahmad Tashkini, 2006. "The P-star Model in Iran (1960-2005)," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 11(1), pages 115-122, winter.
    3. J.M. Groeneveld & K.G. Koedijk & C.J.M. Kool, 1997. "Money, prices and the transition to EMU," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 50(203), pages 481-504.
    4. Tödter, Karl-Heinz, 2002. "Monetary indicators and policy rules in the P-star model," Discussion Paper Series 1: Economic Studies 2002,18, Deutsche Bundesbank.
    5. John E. Morton & Paul R. Wood, 1993. "Interest rate operating procedures of foreign central banks," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
    6. repec:onb:oenbwp:y::i:20:b:1 is not listed on IDEAS
    7. Robert B. Kahn & Linda S. Kole, 1993. "Monetary transmission channels in major foreign industrial countries," Proceedings, Board of Governors of the Federal Reserve System (U.S.).

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