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Predicting inflation in Euroland: the Pstar approach

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  • Scheide, Joachim
  • Trabandt, Mathias

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.

Suggested Citation

  • Scheide, Joachim & Trabandt, Mathias, 2000. "Predicting inflation in Euroland: the Pstar approach," Kiel Working Papers 1019, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwkwp:1019
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    References listed on IDEAS

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    Cited by:

    1. Carstensen, Kai & Gern, Klaus-Jürgen & Kamps, Christophe & Scheide, Joachim, 2003. "Euroland: Stagnation wird allmählich überwunden," Munich Reprints in Economics 19932, University of Munich, Department of Economics.
    2. Jan Gottschalk & Stéphanie Stolz, 2001. "The Link of the Monetary Indicator to Future Inflation in the Euro-Area: A Simulation Experiment," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 70(3), pages 416-433.
    3. Reimers, Hans-Eggert, 2002. "Analysing Divisia Aggregates for the Euro Area," Discussion Paper Series 1: Economic Studies 2002,13, Deutsche Bundesbank.
    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. Carstensen, Kai & Gern, Klaus-Jürgen & Kamps, Christophe & Scheide, Joachim, 2003. "Gradual recovery in Euroland," Kiel Discussion Papers 405, Kiel Institute for the World Economy (IfW Kiel).
    6. 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 Kiel).
    7. 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 Kiel).
    8. 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 Kiel).
    9. 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 Kiel).

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    More about this item

    Keywords

    forecasting; error correction models; inflation process;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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