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

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  • Lars E.O. Svensson

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 '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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7178.

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Date of creation: Jun 2000
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Publication status: published as German Economic Review, Vol. 1, no. 1 (February 2000): 69-81.
Handle: RePEc:nbr:nberwo:7178

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  1. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, Elsevier, vol. 43(3), pages 607-654, June.
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