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How the P* Model Rationalizes Monetary Targeting: A Comment on Svensson

  • Franz Seitz
  • Karl-Heinz Tödter

In this comment, we answer the question posed in Svensson's (2000) paper 'Does the P* Model Provide any Rationale for Monetary Targeting?'- in contrast to him -- in the affirmative. We argue that a strategy of monetary targeting can be rationalized within the P* framework. Furthermore, we demonstrate that money growth targeting is a special form of inflation forecast targeting based on a 'limited' information set. In contrast to 'full information' inflation forecast targeting, monetary growth targeting is likely to be more robust under changing conditions of the real world. Copyright Verein fü Socialpolitik and Blackwell Publishers Ltd 2001.

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

Volume (Year): 2 (2001)
Issue (Month): 3 (08)
Pages: 303-308

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Handle: RePEc:bla:germec:v:2:y:2001:i:3:p:303-308
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  1. Athanasios Orphanides & Richard D. Porter, 1998. "P* revisited: money-based inflation forecasts with a changing equilibrium velocity," Finance and Economics Discussion Series 1998-26, Board of Governors of the Federal Reserve System (U.S.).
  2. Tetlow, Robert J. & von zur Muehlen, Peter, 2001. "Simplicity versus optimality: The choice of monetary policy rules when agents must learn," Journal of Economic Dynamics and Control, Elsevier, vol. 25(1-2), pages 245-279, January.
  3. Glenn D. Rudebusch & Lars E.O. Svensson, 1999. "Eurosystem Monetary Targeting: Lessons from U.S. Data," NBER Working Papers 7179, National Bureau of Economic Research, Inc.
  4. Lars E.O. Svensson, 2000. "Does the P* Model Provide Any Rationale for Monetary Targeting?," NBER Working Papers 7178, National Bureau of Economic Research, Inc.
  5. 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.
  6. Brand, Claus & Cassola, Nuno, 2000. "A money demand system for euro area M3," Working Paper Series 0039, European Central Bank.
  7. Kai Leitemo, 2006. "Open-Economy Inflation-Forecast Targeting," German Economic Review, Verein für Socialpolitik, vol. 7, pages 35-64, 02.
  8. Michael Scharnagl, 1998. "The stability of German money demand: Not just a myth," Empirical Economics, Springer, vol. 23(3), pages 355-370.
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