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The P* model as a general identity to analyze and forecast the behavior of the inflation rate in the economy of Puerto Rico

Listed author(s):
  • Carlos A. Rodríguez Ramos
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    In this work the P* model is used to analyze and forecast the inflation rate in the economy of Puerto Rico. This model is based on two essential points: the first one is to identify the inflationary potential of an economic system through the estimation of the price level to which the inflation tends to adjust in the long run. The second, points that the price level will be adjust, in the long run, to the forecast of the model. Given the way in which the monetary sector in Puerto Rico its constituted, the model needs to complement with U.S.A. monetary variables , such as, monetary supply, to forecast the inflation. The results indicate a long run relationship between the monetary supply of United States (M1) and the price level, the real production and the island s preferential interest rate. The final model is a good representation of the generating process of information (GPI) and it could be used for forecasting purposes. The same predicts the development of inflation better than the two ARIMA models previously selected.

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    Paper provided by Economics and Econometrics Research Institute (EERI), Brussels in its series EERI Research Paper Series with number EERI_RP_2003_06.

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    Length: 12 pages
    Date of creation: Jul 2003
    Handle: RePEc:eei:rpaper:eeri_rp_2003_06
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    1. Arnold, Ivo J. M., 1996. "Stochastic trends in the long-run behavior of velocity: A new test of the institutional hypothesis," Journal of Policy Modeling, Elsevier, vol. 18(6), pages 623-641, December.
    2. Kenneth N. Kuttner, 1989. "Monetary and non-monetary sources of inflation: an error correction analysis," Working Paper Series, Macroeconomic Issues 89-15, Federal Reserve Bank of Chicago.
    3. Jeffrey J. Hallman & Richard G. Anderson, 1993. "Has the long-run velocity of M2 shifted? Evidence from the P* model," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 14-26.
    4. Hallman, Jeffrey J & Porter, Richard D & Small, David H, 1991. "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?," American Economic Review, American Economic Association, vol. 81(4), pages 841-858, September.
    5. Hall, Stephen G & Milne, Alistair, 1994. "The Relevance of P-Star Analysis to UK Monetary Policy," Economic Journal, Royal Economic Society, vol. 104(424), pages 597-604, May.
    6. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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