This paper studies the usefulness of the P-star model in the analysis of the behaviour of prices in Australia and New Zealand. The P-star model is based on the quantity theory of money and the belief that the price level tends to move towards the equilibrium price level. The main contribution of this model is the use of the price gap - the difference between current price and the equilibrium price (P-star) - to forecast inflation. Hence, if the equilibrium price is greater than the current price, there is a tendency for the price level to rise. The equilibrium price in this approach is determined by potential output, the equilibrium velocity of money and the amount of money in the economy.
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Paper provided by La Trobe - Department of Economics in its series Papers with number
00-07.
Find related papers by JEL classification: E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data) E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
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