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

  • Lars E. O. Svensson

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 `real 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. Copyright Verein fü Socialpolitik and Blackwell Publishers Ltd 2000.

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Article provided by Verein für Socialpolitik in its journal German Economic Review.

Volume (Year): 1 (2000)
Issue (Month): 1 (02)
Pages: 69-81

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Handle: RePEc:bla:germec:v:1:y:2000:i:1:p:69-81
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  1. Svensson, Lars E. O., 1998. "Inflation targeting as a monetary policy rule," CFS Working Paper Series 1998/16, Center for Financial Studies (CFS).
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