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Predicting Inflation in Euroland � The Pstar Approach

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Author Info

  • Joachim Scheide
  • Mathias Trabandt

Abstract

Inflation is a monetary phenomenon. While this statement is widely accepted in terms of a long-run relationship, the quantity theory has been made operational also for the short-run dynamics of inflation by so-called Pstar models. An error correction model with quarterly data for the Euro Area is estimated to test whether the price gap has an impact on consumer price inflation. The response of the HICP is strongly positive. Other factors such as raw material prices and unit labor costs also have some explanatory power. The model is used for shock analysis and out-of-sample forecasts. All in all, the Pstar model can be a useful tool for predicting inflation also in Euroland.

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1019.

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Length: 22 pages
Date of creation: Dec 2000
Date of revision:
Handle: RePEc:kie:kieliw:1019

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Related research

Keywords: Inflation process; forecasting; error correction models;

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References

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  1. Karl-Heinz Tödter & Hans-Eggert Reimers, 1994. "P-Star as a link between money and prices in Germany," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 130(2), pages 273-289, June.
  2. Svensson, Lars, 1999. "Does the P* Model provide Any Rationale for Monetary Targeting?," Seminar Papers 671, Stockholm University, Institute for International Economic Studies.
  3. Lars E.O. Svensson & Stefan Gerlach, 2001. "Money and inflation in the Euro Area: A case for monetary indicators?," BIS Working Papers 98, Bank for International Settlements.
  4. Lucas, Robert E, Jr, 1996. "Nobel Lecture: Monetary Neutrality," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 661-82, August.
  5. G. Coenen & J.-L. Vega, 2001. "The demand for M3 in the euro area," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(6), pages 727-748.
  6. Gilbert, Christopher L, 1986. "Professor Hendry's Econometric Methodology," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 283-307, August.
  7. Scheide, Joachim, 1998. "Central banks: no reason to ignore money," Kiel Discussion Papers 316, Kiel Institute for the World Economy (IfW).
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Citations

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Cited by:
  1. Gern, Klaus-Jürgen & Kamps, Christophe & Scheide, Joachim, 2001. "Euroland: Konjunkturschwäche wird überwunden," Open Access Publications from Kiel Institute for the World Economy 2656, Kiel Institute for the World Economy (IfW).
  2. Gern, Klaus-Jürgen & Kamps, Christophe & Scheide, Joachim, 2001. "European economic outlook : general report presented at the AIECE meeting in Paris, May 9 - 11, 2001," Kiel Discussion Papers 376/377, Kiel Institute for the World Economy (IfW).
  3. Tödter, Karl-Heinz, 2002. "Monetary indicators and policy rules in the P-star model," Discussion Paper Series 1: Economic Studies 2002,18, Deutsche Bundesbank, Research Centre.
  4. Kamps, Christophe & Scheide, Joachim, 2001. "End of the upswing in Euroland: No reason to cut interest rates," Kiel Discussion Papers 374, Kiel Institute for the World Economy (IfW).
  5. Kamps, Christophe & Scheide, Joachim, 2001. "Euroland: Abkühlung der Konjunktur - kein Grund zu Aktionismus," Open Access Publications from Kiel Institute for the World Economy 2574, Kiel Institute for the World Economy (IfW).
  6. Jan Gottschalk & Stéphanie Stolz, 2001. "The Link of the Monetary Indicator to Future Inflation in the Euro Area � A Simulation Experiment," Kiel Working Papers 1057, Kiel Institute for the World Economy.
  7. Carstensen, Kai & Gern, Klaus-Jürgen & Kamps, Christophe & Scheide, Joachim, 2003. "Euroland: Stagnation wird allmählich überwunden," Open Access Publications from Kiel Institute for the World Economy 3081, Kiel Institute for the World Economy (IfW).
  8. Reimers, Hans-Eggert, 2002. "Analysing Divisia Aggregates for the Euro Area," Discussion Paper Series 1: Economic Studies 2002,13, Deutsche Bundesbank, Research Centre.

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